Games Workshop disappoints, but its IP is shining
The company enjoys a growing royalty stream, also known as "money for nothing".
I’d like to give you an update Games Workshop (LON:GAW), owner of Warhammer - the most popular miniature wargame in the world.
Share price: £61.30
Market cap: £2.0 billion
Disclosure: I bought GAW shares in November 2019 at £52.60, for about 2% of my portfolio, and sold my entire holding recently at £69.22.
The company issued a typically brief trading update this morning, for the financial year ending in May 2022. The profit figure is below expectations by a few million pounds:
core revenue “not less than £385 million” (previous year: £353 million)
royalties receivable of £28 million (previous year: £16 million).
profit before tax “not less than £155 million” (previous year: £151 million).
Additionally, the company tells us that £10 million has been paid to staff in cash bonuses for the year (these are egalitarian bonuses - every member of staff gets the same bonus).
Last year, the staff bonus was £13 million, so there has been some recognition of the decline in core revenue.
It’s worth noting the decline in the GAW share price since last year. We are down almost 50% compared to a year ago:
I sold my own holding in the company recently, during a spring-cleaning exercise to raise some funds. While I did make a profit, I didn’t make the much larger gain that would have been achieved if I sold out last July.
But I’m still very interested in the fortunes of the company, and won’t rule out investing in it again.
The piece of today’s update that I want to highlight is the royalties receivable of £28 million, up from £16 million the prior year.
Why am I always banging on about this? Because it’s almost 100% margin, costless, pure cash profits!
While GAW does need to maintain the value of the Warhammer brand, in order to grow its royalties receivable, there is nothing else it needs to do. So long as the Warhammer brand is popular, all that GAW needs to do is sign deals, then sit back and collect the cheques!
There is no equipment needed, no machinery to buy, no inventories to hold. Other companies do the legwork, and then they send GAW the royalty stream.
On a related note, here are some snippets from today’s trading update released by game developer and publisher Frontier Developments (LON:FDEV). I’ve added the bolding:
Our most recent Frontier Foundry title, Warhammer 40,000: Chaos Gate - Daemonhunters, received a very positive reception at its launch on 5 May 2022. After one month of sales it has already become our most successful Frontier Foundry title to date, with performance above expectations.
On top of that, Frontier Developments lists Warhammer: Age of Sigmar as one its two major internally developed game launches coming up. According to a recent investor presentation:
Our Warhammer Age of Sigmar IP real-time strategy game planned for release during calendar 2023 will now release later in that calendar year, falling in FY24. This will improve the quality and longevity of the game, and overall make it more successful.
Frontier is an experienced developer and publisher, and has already had success publishing a Warhammer 40,000 title So I think there are good odds that they will manage this new launch well, too.
All of which is to say that the signs are positive around the prospects for GAW’s royalty income.
This income greatly improves the quality of GAW’s profits, which are already very high-quality due to the company’s strong margins and cash generation from its core activity: manufacturing and selling Warhammer games.
GAW’s trailing P/E multiple is now in the region of 16x. If it gets much lower than this, I think it starts to get very attractive!
What do you think? I’d really appreciate if you could hit the “heart” button, if you enjoyed this article, and leave me a comment!