Games Workshop Analysis

This post is a quick analysis on estimating Games Workshops intrinsic value using simple fundamental analysis tools such as P/B and P/E, two staples in my world of investment finance. Games Workshop has had a tremendous rise in recent years, but has fallen more than 25% since its September 18 highs of £40.00 per share to around £30.00 at the time of writing.

Are the current prices indicative of a buying opportunity? I believe so, and let me tell you why.

We will split this analysis into two sections, assets and profitability for determining an overall opinion on if GW is a promising candidate for further exploration and analysis.

 

Assets as of June 2018

  Assets as of June 2018 Assets as of June 2015
Total Shareholders Equity £84.48m £51.52m
Book Value Per Share £2.60 £1.58
P/B at £30.40 / £5.10 11.68x 3.22x

As the above table shows, Games Workshop has undergone considerable balance sheet changes in the last 3 years. It is on track to double both shareholders equity and book value per share between 2015 and 2020 based on forward looking projections.

Price/Book values at the respective market prices demonstrate an obvious and substantial premium since 2015. The reason for this we examine below:

Profitability as of June 2018

  Normalised Earnings Estimate June 2018 Normalised Earnings Estimate June 2015
Trade profit

32.88m

10.97m

Retail Profit

7.18m (1.05m)
Online Profit 27.88m 14.24m
Product & Supply 23.89m 8.6m
Royalties Profit 9.12m 1.01m
     
Central Costs (8.7m) (6.17m)
Service Centre Costs (12.66m) (11.21m)
     
Total Earnings before Taxes 74.55m 16.59m
Tax Charges 14.87m 4.33m
Comprehensive Earnings after Taxes 59.68m 12.26m

 

Whereas the balance sheet has undergone considerable changes, the profitability of GW has positively soared in recent years. Comprehensive profit is up across the board.

The retail side is maintaining excellent profitability given the current head winds of the high street – it is now fulfilling a profit centre role as opposed to a cost centre. In 2015 the retail division was a tool to support online channels, so this change has been particularly welcome.

It is this significant improvement in wider profitability that has lead to the increase in PB multiple values over recent years.

The Board Game Hit: GWs Soaring Success

Background

Games Workshop has been perfecting the art of high-quality miniatures since 1975, and this 43-year tenure has positioned the company for exceptional performance as growth in gaming continues at record rates throughout much of the developed world.

Kevin D. Rountree took over the role of CEO in 2015 and has exceeded expectations ever since. Since then a number of successful changes have been made to the group.

A few prominent examples include:

1. B2B sales tightening in favour of direct to consumer – this process was both painful and long as wholesale customers (online shops, re-sellers, eBay-sellers and so on) were effectively cut out of the supply chain. This eventually led to a moderate increase in margins and a substantially tighter grip on GWs control of the wider supply chain.

2. With increasing labour costs, a 1-man store format was introduced, and while suffering initial setbacks it has matured into a workable solution for smaller stores to remain commercially viable during these difficult economic conditions for retailers nation-wide.

3. Substantially improved service centre operations as the group continues to invest heavily in improving and centralising fulfilment centres.

The Year Ahead

As we move forward through 2019, we expect to see further capex expenditure on improving the service centres segment of the business to allow for further online growth and the capacity to meet those needs in an effective and efficient way.

We are expecting to see further currency fluctuations and possible supply chain disruption as Brexit continues to develop. This has the potential to adversely impact profitability for 2019.

Expansion in licencing the rich IP GW has created will remain a key driver in growth. This has started to manifest itself in the gaming industry, with a collection of titles launched in recent years (to varying degrees of success). Expansion into film and other media is the obvious next step.

 

Games Workshop is still not a value stock at circa 4 x book value (11.68 vs 3.22) of the 2015 equivalent. This would be considered an expensive value proposition were it not for the substantial increase in profitability that these assets are now equipped to generate.

Profitability compared to 2015 stands at a multiple of 4.87x (£12.2m vs £59.68m) which is exceptional performance. More importantly, in 2015 we paid around £5.10 per share with an earnings base of £12.26m, today we pay £30.40 per share which is a £5.30 premium on an adjusted earnings base of £59.68m.

This is a premium of circa 18% on a profit adjusted basis, and this makes the value proposition of buying GW shares attractive.

While we cannot reasonably expect the rates of growth seen over the last few years to continue, the current levels of profitability are expected to grow, albeit at a slower rate. This coupled with a generous dividend policy makes GW an attractive proposition at current market prices.

As to my earlier question of if GW deserves further analysis and exploration? Well, that’s a resounding yes.