Games Workshop has now released their final results for the year ended 2018.
Revenues increased when compared to last year with a £33M growth in trade revenue, a £17.1M increase in retail revenue and an £11.6M increase in online revenue. Depreciation was up £414K, amortisation increased by £1.4M, cost of inventories grew by £3.7M and other cost of sales increased by £13.5M to give a gross profit £42.7M higher. Redundancy costs were down £771K and impairment costs fell by £833K but development costs grew by £1.3M and other operating costs were up £8.6M. Royalty income was £2.4M higher to give an operating profit £36.3M ahead. Interest charges increased by £135K and tax charges were £7M higher to give a profit for the year of £59.7M, a growth of £29.1M year on year.
When compared to the end point of last year, total assets increased by £29.4M driven by a £7.7M growth in inventories, a £10.6M increase in cash, a £5M growth in plant, equipment and vehicles, a £2.2M increase in land and buildings and a £1.2M growth in development costs, partially offset by a £1.9M reduction in the loan to shareholders. Total liabilities also increased due to a £3.6M growth in trade payables, a £2M increase in current tax liabilities, a £1.6M growth in other payables and a £1.3M increase in accruals.
Before movements in working capital, cash profits increased by £37.8M to £87M. There was a cash outflow from working capital and tax payments increased by £6.7M to give a net cash from operations of £70M, a growth of £26.1M year on year. The group spent £14.7M on property, plant and equipment, £5.4M on product development expenditure and £1.5M on software to give a free cash flow of £48.5M. Of this, £38.7M was paid out in dividends to give a cash flow of £10.8M and a cash level of £28.5M at the year-end.
The operating profit in the trade division was £32.9M, a growth of £14.9M year on year with growth in every major country they sell their products in. Sales to trade accounts that sell primarily online continue to perform well.
The operating profit in the retail division was £7.2M, an increase of £6.7M when compared to last year. The group opened a net 27 new stores with the vast majority of those being in North America. Over the coming year the focus will be North America and Germany.
The operating profit in the online division was £27.9M, a growth of £9.1M when compared to 2017. Sales of the Forge World range grew by 4% and the Citadel range by 52%.
The operating profit in the product and supply division was £23.9M, an increase of £7.6M when compared to last year.
The operating profit from royalties was £9.1M, a growth of £2.2M year on year due to the strong performances of Total War: Warhammer II and Warhammer: Vermintide 2.
Gross margin declined in the year from 72.4% to 71.4% as a result of some of the teething problems a step change in volumes brings. It has also been affected by the sales mix of new and existing product as well as channel mix changes. Other costs have increased due to investment in the store opening programme and the centrally managed operations and support teams. They also paid out £4.8M in discretionary bonuses to staff.
During the year the group launched a new edition of Warhammer 40,000. They also released additional specialist games such as the standalone box game Necromunda. Another such title, Adeptus Titanicus, is coming in 2019. They also launched a combat game for two platers, Warhammer Underworlds and announced the relaunch of their Warhammer: Age of Sigmar.
There has been quite a lot of capex this year. They invested £8.9M in the design studio with a further £3.1M spent on tooling for new plastic miniatures. They are currently expanding their manufacturing facility to ensure they can make all of the models that they need and are also working on a significant project to upgrade their core IT systems that interface with the manufacturing and warehouse systems. The project to upgrade the IT infrastructure and software for the warehouse that supports the online store was delivered in September 2017.
During the year they purchased two acres of land next to their HQ in Nottingham for £1.7M and later this year will have redeveloped this to increase their manufacturing capacity and improve their R&D capabilities. The total cost of the new facility, including the purchase of the land, will be around £9M. The manufacturing investment included doubling the number of plastic injection moulding machines as well as increasing the average staffing levels. Production payroll costs have increased by £2M. Total warehousing costs have increased by £2.5M.
The board continue to believe that there are great opportunities for growth, particularly in North America, Germany and Asia. Going forward, however, it is unrealistic to assume that the group can continue to grow at rates they have reported over the past two years.
At the current share price the shares are trading on a PE of 16.8 which increases to 18.2 on next year consensus forecast. After a hike in the dividend the shares are yielding 4.1% which reduces to 3.9% on next year’s forecast. At the year-end the group had a net cash position of £28.5M compared to £17.9M at the end of last year.
On the 19th September the group released a trading update where they said that trading is in line with board expectations and cash generation remained strong.
On the 27th September the group announced that ex-Chairman Tom Kirby was selling around £20M if shares representing around 1.6% of the total share capital. He continues to hold 4.8% of the capital and has agreed to a lock-up on his remaining shares for 180 days.
On the 18th October the group released another trading update where they state that trading has continued well. Compared to the same period last year, sales are ahead but profits are flat. The board remains aware that there are some uncertainties for the rest of the year, however, which sounds a bit ominous.
Overall then this has been an incredibly good year for the group. Profits are up, net assets increased and the operating cash flow improved with oodles of free cash being generated. All divisions and regions saw improvements and the slight reduction in gross margin is probably to be expected. So, this is a stonking buy then? Well, I’m not sure. The question is, how sustainable is this performance? The shares are no longer a bargain with a forward PE of 18.2 and yield of 3.9%, although with a chunk of net cash this is by no means expensive, but more worryingly they are talking of future uncertainties this year. It looks as though profits won’t grow and I am a little concerned this is being lined up for a profits warning. I could be wrong but I have made so much from this share over the past couple of years and I want to err on the side of caution and lock that profit in.
On the 27th November the group announced that CEO Kevin Rountree sold 17,659 shares at a value of £511K in order to fund a house purchase. Following the sale he now owns 14,555 shares.
On the 7th December the group released a trading update covering the half year. Prelim estimates indicate sales of £124M and an operating profit of £41M which are in line with expectations.