Will Games Workshop join the FTSE 100? The blistering rise in the fantasy figurine producer’s share price in recent years has made entrance into the premier league of London’s public market seem a case of when, not if.
The Nottingham-based group has a market capitalisation larger than many longstanding members of Britain’s corporate establishment including Marks & Spencer, Tate & Lyle, the ingredients specialist, and Pennon, the water utility.
Trading figures for the 12 months to May indicate why investors are right to have high expectations of the wargames miniaturist. Revenue leapt 34 per cent, which, thanks to the benefit of relatively fixed costs and a margin boost, translated into an operating profit growth rate of almost twice that. High cash generation also meant a big rise in dividends, with a payment of 235p a share declared for this year, up from 145p for the previous year.
Unsurprisingly, lockdown tedium only ignited enthusiasts’ clamour for the fantasy fodder on offer from the manufacturer and retailer behind the Warhammer brand. But demand that mighty is asking for trouble amid the supply chain turmoil blighting companies in recent months.
In Australia global shipping and container constraints restricted imports, while Brexit hindered deliveries to the Continent. Both have improved in recent months, according to the chief executive, Kevin Rountree, and it’s investing in increasing its plastic manufacturing and paint-filling capacity.
Rountree’s appointment as chief executive in 2015 marked a turning point in the group’s fortunes. The original brand Warhammer was reinvigorated as Warhammer: Age of Sigmar, the range of pricing points was broadened and warhammer-community.com was launched to increase digital engagement with customers.
It’s easy to deride the dystopian wargames created by Games Workshop as nerdy and niche but investors are less sniffy — the FTSE 250 group has delivered a stellar total return of just over 1,500 per cent over the six and a half years since Rountree has been in the top job.
The market’s earnings expectations have not just been maintained, they have become greater. A forward share price to earnings multiple of just over 30 is well above an average of 20 since the start of 2015. Are investors headed for a reality check?
There is little real reason to think so. First, sales growth rates have remained solid across all regions. Trade sales, made through third-party retailers, were strong as more accounts were added, online gained during lockdown and revenue from its own stores was down only a touch, which was impressive considering the shop closures during the year.
Continued demand in the most mature UK market is particularly encouraging for those pondering the saturation point. North America and a barely touched Asian market are being eyed for high future growth.
Appetite for new releases among loyal hobbyists remains strong. The new edition of the Warhammer 40,000 range released last July was its most successful launch “by a considerable margin”. Being highly operationally geared means that expanding sales should have an outsized impact on the bottom line. Manufacturing and selling its own product also keeps profit margins high.
Second, there’s the potential for higher online sales, which were up 70 per cent last year, to stick. Visits to warhammer-community.com were up 16 per cent last year and work has also started on a new online store.
Then there’s royalty income. Licensing the intellectual property rights for the production of merchandise including video games and magazines provides a decent kicker to income. It only amounted to £16.3 million, but that’s pretty much pure profit. There’s also, as Peel Hunt’s Charles Hall puts it, the “virtuous circle” between sales of Warhammer video games and turning more consumers on to the tabletop games.
It would seem foolish to bet against Games Workshop continuing its push from the fringes into the UK’s publicly listed elite, even if it will set you back a bit.
ADVICE Buy
WHY High market expectations for growth are more than justified by demand in new and existing markets plus the benefit of fat margins
Greencore
As a producer of food for those on the move, Greencore should have all the ingredients for a recovery play on easing lockdown restrictions.
Yet since news of the vaccine rollout broke in November, shares in the Irish food group have lagged the steady gains by the FTSE 250 after spooking investors in May.
The road back to rebuilding sales has been a long one, so investors were sated with morsels of good news. Adjusted operating profit is expected to be between £36 million and £40 million for this year, up from previous guidance of profits above the 2020 level of £32 million.
More people moving around meant food-to-go sales, which were most heavily dented by successive lockdowns, have steadily recovered during the 13 weeks June 25.
Sales in the category were 9 per cent behind the same time in 2019, easing to 4 per cent by June. It’s worth noting that after stripping out the impact of winning new business, food-to-go third quarter sales were 15 per cent below pre-pandemic levels.
What might more homeworking mean for Greencore? More workers returning to the office would be helpful, although it isn’t completely beholden to city centres; for instance major customer Co-Op also has a sizeable suburban footprint.
Improving cash generation has helped push down net debt, which excluding lease liabilities is expected to be below £240 million at the end of September. That would equate to a multiple of under three versus earnings before interest, taxes, depreciation and amortisation (ebitda), comfortably below a covenant ceiling multiple of five. But most analysts covering the stock don’t anticipate the dividend being reinstated until 2022, when a payment of 3.45p a share is forecast.
House broker Shore Capital has forecast sales of £1.3 billion this year and ebitda of £96 million, with the latter not recovering back above pre-pandemic levels until 2023. Its been a slog back for Greencore but its efforts have been recognised by the market via an improved forward enterprise value/ebitda multiple of 11. That looks a full enough valuation for now.
ADVICE Hold
WHY Progress on sales recovery and balance sheet strength should give investors confidence
