Just how deep the ardour of Warhammer’s die-hard fan base runs is being tested in a way that it rarely has been in Games Workshop’s 47-year history. The hobbyist retailer is in the grips of the heaviest downturn the shares have suffered since joining the market almost 30 years ago, now down 47 per cent from last year’s peak.
Racy valuations are naturally less palatable in the face of rampant inflation and rapidly rising interest rates, and the Nottingham-based fantasy figurine maker and retailer had garnered a valuation to match the most dominant of the US tech darlings. A stellar record of earnings growth in recent years has resulted in harsh punishment this year.
Games Workshop is at the mercy of the same margin pressures as mass market retailers. Hobbyists are loyal but not above the strains on disposable income. The impact of cost inflation on the retailer’s bottom line is readily visible. Pre-tax profits declined to around £39 million over the three months to the end of August, down from £45 million the same time last year, on the back of higher freight and raw material costs, together with the expense incurred from investing in its online store.
Manufacturing all products in the UK and selling roughly 80 per cent overseas meant the strengthening of sterling versus other currencies should provide a counterweight to cost inflation. But extrapolating exactly how the business performed when currency fluctuations are stripped out is not something disclosed by a characteristically skeletal update to the market.
Analysts at Panmure Gordon think the retailer will still manage pre-tax profit growth of 4 per cent this year, broadly in line with last year’s annual growth rate. First quarter comparables this year are tougher, as trading last summer benefited from the release of a new edition of the Warhammer Age of Sigmar tabletop game. New releases are a key catalyst for sales.
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The sell-off has made the shares cheap by Games Workshop’s historical standards. At 17 times forward earnings, the shares are far below a peak multiple of 47 and below the average multiple reached since its chief executive Kevin Rountree was appointed in 2015. The descent from last year’s highs is logical given cost inflation pressures. But the reversion to a profit multiple back nearer 2018 standards is not, given the business is mining a broader range of potential income streams.
Building the business in the Asian market is one fount of revenue growth. Progress in North America, the biggest contributor to revenue at 44 per cent of the group total last year, illustrates the rewards to be gleaned from geographical expansion. Online sales had grown to 22 per cent of sales last year.
Licensing the rights to merchandise is another source of income. It is less predictable than core revenue but is pretty much pure profit, adding £25.4 million to £132 million of operating profit from the core business last year. Analysts at house broker Peel Hunt reckon it can still manage £20 million in royalties this year, minus a chunky upfront £7.5 million payment from Nexon last year.
It is highly cash generative, ending last year with a net cash balance of £71.5 million. Management has declared a 30p a share dividend alongside the first quarter update. Peel Hunt reckons dividends will total 220p a share this year, which makes the dividend yield more worthy of acknowledgement at a potential 3.4 per cent.
Trading this year will be bumpier than Games Workshop is accustomed to, but clearer and steeper growth prospects set the group apart from most retailers.
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Why The share price weakness presents an attractive entry point to a business with solid long-term growth potential
Galliford Try
The sins of the past haunt London-listed construction companies and a looming recession makes bad memories even harder to banish. Galliford Try’s market capitalisation has shrunk to £174 million, now equalling the value of its cash pile.
That ignores progress made on improving the profitability of contracts and cash generation. Over the 12 months to the end of March, the operating margin rose to 2.4 per cent, putting the contractor further down the path of hitting a 2026 target of delivering a 3 per cent margin on revenue of £1.6 billion.
Most individual contracts are now less than £20 million in value, rather than mega deals that have greater potential to torpedo the bottom line if they prove more expensive to deliver. What about inflation? Most contracts have index-linked payment terms or clauses that allow Galliford to raise the price to account for higher-cost raw materials such as steel or cement.
About 90 per cent of its work is for public sector or regulated industries such as water companies, which could also mean revenue is insulated against a downturn in spending by the private sector. A £3.4 billion order book represents roughly 90 per cent of forecast revenue for this financial year and 60 per cent to 65 per cent of revenue for next year.
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Selling its housebuilding operations to Bovis, now Vistry, in 2020 helped recapitalise the balance sheet. Average month-end net cash plus private finance initiative assets totalled £221 million last year, at the top end of a £175 million-£250 million target. The result? A £15 million share buyback and a 70 per cent jump in the annual dividend and potentially more surplus capital to be returned this financial year.
At the current price that leaves the shares offering a dividend yield of about 4.9 per cent. Consistently delivering a cleaner set of accounts could inspire confidence in investors. Over the previous five years, Galliford Try has recorded chunky exceptional items that have taken a bite out of profits. At least last year £13.7 million in “one-offs” related to acquisitions and upgrading IT systems rather than costs overrunning on contracts, as has been the case in the past.
Advice Buy
Why The shares look too cheap given the substantial cash on the balance sheet and improving margins