Games Workshop: An Excellent Business, But At A Cost

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Manuel Milan

Games Workshop Group (OTCPK:GMWKF) is simply a value business by almost immoderate conceivable metric. It has a unsocial offering, precocious margins, accordant returns connected equity, a rock-solid equilibrium expanse - nan database goes on. However, each business has its adjacent value and, astatine existent trading levels, I don't judge location is simply a capable separator of information to warrant pulling nan trigger present conscionable yet. This is simply a banal to watch closely.

Business Summary

Games Workshop's superior business is successful nan design, manufacture, and waste of miniature Warhammer figurines. These figurines are assembled and painted by the customer and tin beryllium utilized to play tabletop strategy games, aliases conscionable collected and displayed successful their ain right. The Warhammer beingness is simply a imagination mounting wherever armies of humans, elves, orcs, and different creatures conflict for power complete a world of magic, monsters, and ancient powers. This full fictional beingness was created by Games Workshop and has developed a cult-like pursuing complete nan years.

In summation to nan figurines, Games Workshop besides sells a big of supplementary materials specified arsenic paints, novels, video games, etc. Basically, they've created a imagination beingness pinch a crippled to spell pinch it. They'll waste you nan figures to play nan game, nan materials to overgarment nan figures, and nan books to publication astir nan story. This business is each astir nan IP (intellectual property); it's what gives it its moat and allows for its sky-high margins. If you're a Warhammer instrumentality (and location are many), location is obscurity other you tin get your hole than from nan Games Workshop and their waste and acquisition partners.

Revenue is divided into licensing gross (6% of full gross arsenic of nan most caller half-year filing) paid by 3rd parties for nan authorities to usage Warhammer IP successful video games, books, etc., and halfway gross chiefly from nan waste and distribution of Warhammer figurines (94%). Core gross is derived from waste and acquisition income (57% halfway sales) to ~6,300 accounts - mostly independent retailers, income made done their web of ~500 beingness Games Workshop stores worldwide (23%), and income made done their website (20%). A large portion of nan user acquisition is going into nan shop itself and perusing nan latest figures successful nan Warhammer universe, which is why online income relationship for a comparatively mini magnitude of full revenue. That said, a caller online shop is scheduled to beryllium released complete nan summer, which is, frankly, agelong overdue.

The institution is headquartered successful nan UK and has its superior listing connected nan London Stock Exchange. It trades successful nan U.S. OTC marketplace nether nan ticker GMWKF.

The Good

Without a doubt, nan trading constituent for Games Workshop is its superb IP and nan loyal customer guidelines that comes pinch it. According to their astir caller filing, nan Warhammer website sees much than 100,000 visits a time and has 718,000 accounts (up 22% complete six months), arsenic good arsenic an aggregate of 1.9m followers crossed societal media platforms.

In August 2021, Games shop released Warhammer+, a £4.99-a-month streaming work dedicated wholly to Warhammer-based shows - arsenic of November 2022, they had 115,000 subscribers and complete 5m views. While gross from this work is not worldly (£3m successful nan astir caller half-year) and I can't spot it overthrowing Netflix (NFLX) immoderate clip soon, I do deliberation it demonstrates nicely nan spot of nan IP. Furthermore, complete 50 video games person been produced (by 3rd parties), including nan bestselling "Total War: Warhammer" series, which, though income figures are unavailable, is estimated to person sold copies successful nan millions.

I deliberation it's safe to opportunity that nan IP they person created is strong. However, astatine nan extremity of nan time business is astir making money, and Games Workshop is simply a business. With a gross separator of 66% and a nett separator of 29% arsenic of nan astir caller filing, it's a profitable 1 astatine that. One conscionable needs to look astatine their return connected equity to spot really resilient this business exemplary really is: 51% arsenic of November, and it has been consistently precocious complete nan past 5 years. I tin ideate Warren Buffett's ears pricking up correct astir now.

Data by YCharts

Take a look astatine their online shop and you tin spot why. A 9cm gangly Daemon Prince exemplary costs £47.50, and that's earlier you've moreover thought astir buying paint. They person you covered successful that department, 12ml of overgarment for only £2.75 a popular - they urge 9 colors for a Daemon Prince. You past request a minimum of astir 20-30 figures to play a crippled (many players person hundreds of pieces successful their collections). You tin commencement to spot really this each originates to adhd up. But nan beauty of it is that group will salary this because location is obscurity other you tin bargain Warhammer. Sure, you tin shop for second-hand models connected sites for illustration eBay, but a ample portion of nan acquisition is successful nan assembly, painting, and customization itself - which you really don't get by purchasing someone's pre-used model.

In my opinion, guidance has been effective successful allocating capital. They person stated that they're not willing successful pursuing acquisitions and are chiefly looking to turn nan business organically, which I work together is nan champion strategy successful this case. The jewel successful Games Workshop's crown is its IP, truthful it doesn't really make consciousness to spell connected an acquisition spree.

Management's argumentation is to return immoderate excess rate to shareholders; arsenic such, they person been paying a dividend comparatively consistently since 2012, pinch a 10-year CAGR of 18.93%. While nan dividend payout ratio is excessively precocious for my liking astatine 84%, I americium satisfied that they are investing sufficiently successful nan business. Obviously, specified a precocious payout ratio makes nan dividend unpredictable arsenic it fluctuates pinch profits and perchance owed to factors extracurricular of management's power (state of nan economical climate, etc.), truthful 1 can't needfully expect nan institution to support nan existent dividend.

Furthermore, they person a patient equilibrium expanse pinch almost nary indebtedness and an ample £85m successful rate arsenic of nan astir caller filing. This institution is simply a cash-generating machine, which is simply a byproduct of its IP-centric business exemplary requiring comparatively small capex. TTM levered free rate travel was £96m, and nan business has been consistently free rate travel positive.

In December, Games Workshop reached an agreement successful principle pinch Amazon (AMZN), exploring nan anticipation of Amazon processing nan Warhammer beingness into movie and TV projects; character Henry Cavill is rumored to beryllium heavy involved. While a Warhammer TV bid connected Amazon Prime is still a agelong measurement off, this is breathtaking news for Games Workshop. As an example, nan hugely celebrated Netflix bid "The Witcher," which was based connected a video crippled of nan aforesaid name, and which coincidentally saw Cavill successful nan lead role, spurred income of nan video crippled to rise by complete 500% and introduced a full caller assemblage to nan franchise. Even if a Warhammer bid has a fraction of nan effect of "The Witcher" it could beryllium awesome news for nan stock.

The Bad

As pinch immoderate business, location are risks. For one, nan business is based wholly connected discretionary spending. The precocious margins are a double-edged beard arsenic they let for immense profitability but successful a mediocre economical ambiance could go its downfall arsenic group can't spend to walk £50 connected integrative miniatures. In my opinion, this is nan top consequence facing Games Workshop. However, income fared good successful 2022 - successful fact, they were astatine grounds highs contempt a world costs of surviving situation and soaring inflation.

There person been concerns that nan emergence successful 3D printing could airs a threat to nan business. I americium not peculiarly worried astir this; entry-level 3D printers person been disposable astatine a comparatively debased value for a number of years now, pinch seemingly nary effect connected nan apical line. I judge that group worth having charismatic Warhammer figures arsenic a matter of pride, and worth nan organization experience. In nan aforesaid way, you wouldn't really 3D people a Lego group aliases a "Star Wars" figurine, moreover though you could and it would astir apt beryllium cheaper.

IT is an issue, arsenic 1 speedy look astatine their online store will reveal. They are presently heavy reliant connected bequest IT infrastructure and are moving connected implementing a caller IT system, which has been beset pinch delays. Their caller online shop has been delayed until nan summer. However, only 20% of income are made connected their website arsenic nan in-store acquisition is peculiarly good.

Games Workshop intelligibly has awesome IP, but it requires updating truthful arsenic to not get stale. They request to perpetually beryllium evolving nan story, releasing caller figures, and keeping their assemblage captivated - otherwise, location is simply a existent consequence of stagnating and boring their customer base. I americium reassured that this will not beryllium nan case, though; successful nan astir caller half-year, they spent a patient £7m connected merchandise improvement - half of investing rate spent and an summation successful nan number of jobs successful nan creation section by 20 to 304. I americium assured that guidance understands that occurrence is powerfully limited connected finance successful their creation studios.

Recent Performance

In January, Games Workshop posted comparatively beardown results for nan half twelvemonth up to Nov. 27, 2022. Revenues were £226.6m for nan period, up 7% during nan aforesaid play nan anterior year, pinch a profit of £66.5m vs. £71.2m nan twelvemonth before. The driblet successful profits is chiefly down to nan higher costs of equipment sold squeezing gross margins, arsenic good arsenic a driblet successful licensing revenue. The second is highly profitable, pinch 100% gross margin, truthful drops successful licensing gross person an overweight effect connected nan bottommost line.

On a changeless rate basis, gross really remained level pinch nan aforesaid play past year. This lackluster maturation was for a number of reasons including ~£2m of mislaid revenues from Russia and mediocre capacity successful China owed to lockdowns. Trade and unit gross some accrued somewhat complete nan play and online decreased very slightly. This is successful statement pinch expectations arsenic online income were expected to slow pinch nan continual reopening of unit stores worldwide.

Licensing gross was £14.3m vs. £20.1m for nan aforesaid play past year, but this doesn't interest maine arsenic past year's fig was abnormally precocious owed to a precocious level of guaranteed income connected multiyear contracts signed successful that play - including 1 guarantee of £7.5m. This income is recognized successful nan period, but nan rate is paid complete nan life of nan license. Of nan £66.5m profit, £54.2m (82%) was paid retired arsenic dividends complete nan period.

Games Workshop income connection for nan half-year ending 27th November 2022 (Games Workshop Investor Relations)

Valuation

The Games Workshop is simply a awesome company, but does it travel astatine a awesome price? With a existent P/E of astir 24, almost astatine its highest constituent successful nan past 12 months and supra its five-year mean of 22, I don't deliberation so. While location is nary cleanable comparison to behaviour comparative worth study owing to nan unsocial business, looking astatine companies for illustration crippled shaper Hasbro (HAS) trading astatine a P/E of 20, artifact shaper Mattel (MAT) trading astatine a P/E of 15, and a median P/E crossed nan user discretionary assemblage of 15, it seems arsenic if Games Workshop isn't inexpensive comparative to nan assemblage astatine this infinitesimal successful time. While I do judge this banal should decidedly beryllium priced astatine immoderate premium, location is not a capable separator of information present to liking maine astatine nan existent trading levels.

Data by YCharts

Conclusion

Games Workshop is simply a awesome business, and I deliberation I person made my sentiment connected it beautiful clear. However, 2023 will beryllium a difficult twelvemonth for nan company, pinch a worsening world economical ambiance apt impacting top-line income while ostentation squeezes nan margins. As such, I deliberation location will beryllium opportunities to prime up this banal astatine a discounted value successful nan coming months arsenic we commencement to spot this effect nan financials and nan banal price. Fundamentally, this is somewhat of a short-term hurdle that I don't deliberation will effect nan business importantly successful nan mean to agelong run. I will beryllium looking to bargain this banal astatine a sub-20 P/E.

Having said that, I do deliberation it's astir apt trading astatine a astir adjacent value correct now fixed nan spot and profitability of nan business. If you return a semipermanent position this could beryllium absorbing astatine existent levels. In nan words of Warren Buffett himself, "it's acold amended to bargain a awesome institution astatine a adjacent value than a adjacent institution astatine a awesome price." Of course, I would alternatively bargain a awesome institution astatine a awesome price, and I deliberation pinch immoderate patience this is achievable. I would urge keeping a adjacent oculus connected Games Workshop.

Editor's Note: This article discusses 1 aliases much securities that do not waste and acquisition connected a awesome U.S. exchange. Please beryllium alert of nan risks associated pinch these stocks.

Investor pinch acquisition moving successful a buy-side institution, researching immoderate opportunity I find interesting.