Games Workshop share price: a game worth playing?

Games Workshop Group (GAW) has experienced incredible growth over the last few years. The share price for the wargame manufacturer rose by 101.5% in 2019.

The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results

Games Workshop is a constituent of the FTSE 250, where it ranked fifth highest in terms of contribution to the index’s total return in 2019. You’d be wrong to think this was a one-off. In 2018 the company came in at eighth and was the second highest performer in the FTSE All-Share Index in 2017, generating a total return of 267.17%, beaten only by KAZ Minerals (KAZ).

To illustrate the company’s extraordinary growth, look no further than the chart below.

Figure 1: Games Workshop (GAW) market cap and share price

Source: Bloomberg, January 2020

The meteoric rise in Games Workshop has coincided with growth in the gaming industry, which has been well documented over the last decade. We have seen Fortnite, a free-to-play online video game, post record sales of $1.8 billion in 2019 – the highest of any game in history.1 Record viewership numbers have followed, with 3.9 million peak viewers tuning into a League of Legends World Championship semi-final, 94% higher than last year’s tournament.2 Millennials really do love gaming.

Whilst most of the growth in the gaming industry is attributed to online video games, the board gaming scene has experienced a recent resurgence and growth is expected to continue in the coming years.

Arizton, an advisory and research firm, predicts the board games market will grow to £12 billion by 2023, from around £8 billion today.3 The market is forecasted to grow by +8% per year due to the growing audience of gamers and a trickle-down effect to sub-sectors such as board games. Also, as Games Workshop point out, people enjoy the social side of gaming together in-person, as opposed to playing behind a screen.

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Solving the puzzle: what does the company do?

Games Workshop is the largest hobby miniatures company in the world and was founded over 30 years ago. Its most successful brand is the iconic Warhammer product and it also holds the license for The Lord of the Rings Battle board game. With over 400 retail stores globally, it is a truly vertically integrated business as it controls the design, manufacturing and distribution of its product range. Although, the company is keen to outline that it is a manufacturer, not a retailer, with retail stores being used to engage with customers and introduce them to the hobby of painting, collecting and playing with the fantasy miniatures.

Rachel Tongue, finance director at Games Workshop, has a tight grip on the financial health of the company. The group’s policy is to pay dividends entirely out of any ‘truly surplus cash’, not out of debt – which should be music to the ears of long-term shareholders. Moreover, the company has had no outstanding long or short-term debt since 2010. Lastly, to further demonstrate this, take a look at the below snippet from the company’s investor relations website:

'We don’t spend money on things we don’t need, like expensive offices or prime rent shopping locations or advertising that speaks to the mass market and not our small band of loyal followers. We only invest where it makes a positive improvement to our business model.'

Guess Who: Games Workshop shareholders

Institutional investors account for the majority of Games Workshop’s shareholders with investment advisory firms holding 74%, based on publicly reported data. A new addition to this list is Schroders who disclosed on 11 December 2019 that they had purchased 5.6% of the 32.7 million shares outstanding in Games Workshop.

Interestingly, the former chairman of the group, Thomas Kirby, still owns 4% of the company. On 27 September 2018, Kirby spooked shareholders by issuing the sale of £20.3 million worth of Games Workshop shares – causing the share price to fall by 4.2% the following day. After the sale, Kirby was subject to a 180-day lockup period for his remaining holdings, which has now expired meaning we may see a reoccurrence sometime this year.

Figure 2: Top 10 investors in Games Workshop shares

Shareholders Shares owned as % of total outstanding Type of investor
1. JPMorgan Chase & Co 9.14% Investment Advisor
2. Schroders PLC 5.58% Investment Advisor
3. Standard Life Aberdeen PLC 5.54% Investment Advisor
4. BlackRock Inc 5.44% Investment Advisor
5. Vanguard Group Inc/The 4.05% Investment Advisor
6. Castlefield Investment Partners LL 3.97% Investment Advisor
7. Kirby Thomas H F 3.96% Former GAW Chairman
8. Soros Fund Management LLC 2.71% Hedge Fund
9. Dimensional Fund Advisors LP 2.60% Investment Advisor
10. Credit Suisse Group AG 2.59% Investment Advisor

Source: Bloomberg, January 2020

The (Trivial) Pursuit of returns: what does 2020 have instore for Games Workshop?

Edison Investment Research, the primary broker for Games Workshop, is one of only two firms who do so, with the other being Peel Hunt. Both will be keeping a close eye on the half-year results which will be published on 14 January 2020.

The consensus amongst analysts, albeit an extremely small sample size, is that the upcoming year will be another positive one for the group. In its most recent research report posted at the start of November, Edison revised its share price valuation upwards by 10% to £51.76 after a strong five-month trading statement. Since then, the share price has exceeded Edison’s target price by 20.5% (as of 7 January).

Looking at the previous four years, revenue and net income and have grown by a compound annual growth rate of 21.4% and 47.7%, respectively. In what will be an interesting next couple of years for the company, Kate Heseltine, an analyst at Edison, projects growth to continue into 2020 and in the following year, as indicated in the below graph.

Figure 3: Games Workshop Net Income and Revenue (History & Forecasts)

 

Source: Bloomberg, January 2020, data from 2020 and 2021 are estimates.

Half-year results update: What is the latest for Games Workshop?

Earlier today, Games Workshop announced record breaking half-year results which sent the share price upwards of 7% since market open. Revenue and operating profits reached all-time highs, both came in at £145.6m and £59.2m respectively. In comparison to the previous six-month period, revenue was up £23.2m whilst operating profits increased by 45.1%.
Dividends jumped 45 pence from the previous year to 100 pence per share. Interestingly, royalties receivable increased by £5.2m up to £10.7m in the period, which is a segment the company is eagerly looking to grow whilst maintaining its high-quality IP image.

Games Workshop also provided an update on its strategic priorities, highlighting that its people are critical to the success for the group. Thus, the company has increased investment into recruitment, pay and other employee benefits. Additionally, digital engagement has strengthened as the company continues to grow its reach, users accessing their community website grew by 48% compared to the same period last year. Furthermore, it added 19 stores, including relocations, bringing its total number up to 529 at the end of the period.

Finally, looking at the potential risks, the company outlined the impact Brexit could have on the business. It indicated that the two key risks relate to the difficulty of moving goods and uncertainty surrounding the labour market, in terms of recruitment and retention of staff. Plans have been made to mitigate the effect of both risks. Other business risks include, recruitment, IP exploitation and managing its supply chain.

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