The loyalty of Warhammer’s diehard fan base can be tested but not defeated — or so its latest numbers suggest.
Games Workshop has snapped the hiatus in sales growth with more vigour than expected. Revenue for the past financial year is set to come in at no less than £440 million and pre-tax profit no worse than £170 million, better than respective forecasts of £437 million and £160 million by the retailer’s house broker, Peel Hunt.
The shares have broken back through the magical £100-mark for the first time since the turn of last year, but there should be more mileage in the recovery for the fantasy figurine maker.
The launch of a new edition of Warhammer 40,000 this month will be a major fillip. In 2018 and 2020, the years when the last two editions of its most popular war game were released, sales rose 39 per cent and 31 per cent, respectively. Kicking its new online store into operation, which had been due to go live at the start of this year, could also provide a boost to the top line.
Then there is the benefit of any relief from cost inflation. Higher freight, raw material and staff costs squeezed the operating margin by four percentage points to 32.4 per cent over the first half of the financial year just gone. The increase in transportation costs alone equated to 1.9 per cent of sales during that six-month period. Freight costs across the board have come back down to pre-pandemic levels, which bodes well for Workshop’s margin.
The fantasy titan has long attracted a premium, fitting of the stellar earnings growth. But recently it has been burdened by its past success. A boom in sales during the pandemic set up Games Workshop for a fall when global sales growth inevitably slowed.
A painful comedown from the spike in sales growth in 2021 has left the shares valued at about half the 2020 peak. True, a forward price/earnings ratio of just over 24 is still a premium to the average since Kevin Rountree took the top job in 2015, but that is justified by the expansion of avenues for monetising hobbyists’ love for its miniatures.
Under Rountree’s tenure, pre-tax profits have grown at a compound annual rate of 44 per cent, accompanied by a 26 per cent average rise in revenue. The difference between the rates of expansion in the top and bottom lines is a result of a canny strategy to licence its Warhammer brand to third parties through video games, TV and merchandise. Licensing fees are set to come in at £25 million for the past year, equating to 6 per cent of the core revenue generated by the business. That may look like small fry, but without usual costs of doing business, it drops straight through to the bottom line.
Then there is potentially the most lucrative licensing deal of all, an agreement in principle with Amazon for the tech giant to develop films and television shows based on the Warhammer universe, signed at the end of last year. Note any fruits of that tie-up, are conservatively, not included in earnings forecasts.
The hobbyist retailer does face nearer-term challenges, not least from diminished spending among North American consumers, which hampered demand towards the end of last year. However, efforts by Rountree to push further into the Asia market means the group should be fitter to withstand fluctuations in individual economies.
As a strongly cash-generative business, it is perennially in a net cash position. When it does spend, it is a prudent allocator of capital. Even amid recent challenges, the return on capital employed came in at 112 per cent over the first half of last year. Loyalty to the FTSE 250 could prove fortuitous for investors, too.
ADVICE Buy
WHY A strong recovery in sales could produce a more sustained rally in the shares
Robert Walters
Rampant wage inflation had become the well-worn riposte for recruiters against naysayers, who pointed to a darker economic picture threatening hiring activity. A profit warning from Robert Walters indicates the flimsiness of that argument.
Weaker confidence that emerged at the end of last year among employees, more reluctant to jump ship, and employers more circumspect about taking on staff, was no blip. In his first update to the market, Toby Fowlston, the newly appointed chief executive, has been forced to guide to profits this year that will be significantly lower than the £51.2 million the market had expected.
Net fee income over April and May fell 10 per cent on last year, if currency fluctuations are stripped out, a substantial worsening from the flat fees recorded during the first quarter. A slower recovery out of strict Covid restrictions in China and the pullback in hiring within the tech sector were both contributors.
Generating fees based upon the first year of a candidate’s salary means recruiters like Robert Walters are natural beneficiaries of the elevated wage inflation that has persisted over the past two and a half years, but that’s no good if hiring volumes sink.
About 70 per cent of Robert Walters’ fee income comes from permanent hires and the rest from temps. That mix positioned it to benefit from the spring-back in employment post-pandemic, but in the current downturn it means fees could take more of a hit from companies nervous about committing themselves to an increased staff base.
Signs that subdued hiring activity may be more ingrained than initially thought was reflected in the magnitude of the 14 per cent share price drop on update day. At just over eight times forward earnings, the shares are almost as lowly valued as when national lockdowns hit in 2020.
Analysts at Jefferies think consensus profit forecasts could halve as the shortfall in revenue is amplified by the heavy investment in headcount by the recruiter over the past two years. Poor visibility over future income means recruiters will struggle to convince investors that they deserve a higher price.
ADVICE Avoid
WHY There is the risk that profit may disappoint again if hiring activity doesn’t improve
