Games Workshop: a modern-day Tom Sawyer
Today's swashbuckling results almost met the expectations of highly demanding investors.
It’s only been a month since I covered Games Workshop (GAW). But here I am again!
Share price: £73.25p (-3% today)
Market cap: £2.4 billion
Today’s full-year results for FY May 2022 show revenues slightly exceeding expectations at £386.8 million.
After-tax profits are a more significant beat and come in at £128.4 million (expected: £125m).
If the results are so good, why are the shares down today?
Could it be something that CEO Kevin Rountree said in the outlook statement?
We are on the front foot, have a clear strategy for our core and licensing business, a culture built on long standing proven principles, a pretty good operational plan building on the progress we have made, a work ethic built on trust and a hobby that is fun and engaging. We look forward with a great deal of confidence.
Hmm. I can’t find anything alarming here!
Could it be the dividend? Well, today’s dividend has more than doubled compared to last year’s.
Or perhaps traders got too excited over the past month, in anticipation of these results.
Since my article was published, GAW shares have risen by 26%. On no news.
So that is my theory for today’s share price weakness: investors erroneously expected that market expectations would be exceeded by an enormously large amount.
What the results tell us
Firstly, the “core” business (selling Warhammer miniatures and their associated gear) continues to grow and remains wonderfully profitable.
Revenues are up strongly but profits are down by a few million pounds (this could have been deduced from the June trading update).
The few dark clouds, such as Russia/Ukraine and high inflation, are summarised neatly by Kevin Rountree:
Most external factors affecting Games Workshop are not new. My best guess is losing Russia sales for a full year is c.£4 million lost in net revenue. Additional freight and carriage costs is c.2.4% of sales.
As for licensing, this continues to grow at extraordinary percentage growth rates, from a low base: up by 74% in FY 2022 (from £16 million to £28 million). Licensing now has its own dedicated management team, reporting to Rountree.
I’m constantly banging on about the value of this income category, because it turbo-charges ROCE for a business which already had very high ROCE to begin with.
The operating profit for this income stream was £25.4m, to give an operating margin of 91%. See what I mean?
Most licensing income is generated by video game sales, so it will be helpful to keep an eye out for more news from Frontier Developments. In total, eight new games have been announced over the past year.
In summary, the results tell us that both parts of the business are in rude health.
Games Workshop has a unique asset - Warhammer intellectual property that it created, develops and maintains.
To make a successful business, however, requires a multi-pronged strategy. The Games Workshop annual report is a great place to see such a strategy spelled out in detail:
High quality miniatures, the best in the world. The goal is to produce and sell them forever, so they must be sold at prices reflecting their quality.
Own IP: The miniatures are derived from Games Workshop’s “endless, imaginary worlds”. Because GW owns the associated intellectual property, it has full control over the imagery and styles used, and can grow its licensing income.
Customer focus: wants to communicate “in an open, fun way” with customers, and support them wherever they are.
Global nature of the business: look for customers anywhere, using three channels (retail stores, independent distributors, and online). Online sales were 22% of core revenues in FY 2022.
Cash-focused: seek a high return on investment in the long-term, and seek growing sales in the short-term (without any reduction in the operating margin).
What is there to add? If you want to run a successful business, maybe try to take a leaf out of Games Workshop? But don’t bother making a tabletop miniature wargame - Games Workshop has this market tied up.
Enjoying Monopoly Investor? Please consider a paid subscription, if you have not done so already, to help support the growth of this newsletter. Thank you.
GAW shares currently trade on an earnings multiple of less than 20x. For the quality and long-term thinking that’s on offer here, anything less than 20x strikes me as good value.
Finally, I note that the company has added “a small dedicated factory” at its Nottingham HQ, just for paint production.
Games Workshop always strikes me as employing a Tom Sawyer-type of strategy on its customers. “We wouldn’t dream of depriving from you the joy of painting our miniatures!”, the company says.
And so the customers find themselves gleefully carrying out work that would be costly and complicated, if Games Workshop had to do it. Genius.
At least the customers won’t be running out of paint, any time soon.
PS: I’d really appreciate if you could again hit the “heart” button, to let me know you enjoyed this article. Thanks!