Thursday, April 14, 2011

GAW.L - Games Workshop - undervalued

GAW - Games Workshop - 440p/£136m

Games Workshop Group PLC and its subsidiaries design and manufacture miniature figures and games and distribute these through its own network of hobby centers, independent retailers and direct through the Internet and mail order.

GAW is yielding 5.7%, and has net cash of £11.5m. It has a z-score of 8.11, giving it a  "bullet-proof" balance sheet. Projected PBT for y/e May 2011 is £12m (a decrease from £16m in 2010), £15m for 2012, and £16m for 2013. Let's say that the long-term PBT is £15m. GAW has neglible interest, implying an EBIT of £15m also. According to Digital Look, it has an EV of £120m (which sounds about right to me). That gives it an EBIT/EV of 12.5% (= 15/120). This a very good unleveraged earnings yield. It earns high returns on capital (28%, according to Digital Look).

Three directors have just bought shares to the tune of £55k combined. A trading statement on 8 Apr 2011 is brief; PBT is likely to be ahead of market expectations, and cash generation remains healthy.

The directors seem frank and folksy, and it is like reading Buffett. In the y/e May 2010 accounts they admitted:
As we have stated in previous years, we believe that the key risks which face Games Workshop are not external but internal. We are not significantly affected by economic factors, as recent results show. Performance shortfalls in the past have been down to the quality of management and decision making.


GAW has a niche business. It is possible for the niche to grow, but I would not anticipate rapid growth. Think of it as a 5.7% inflation-linked bond, maybe with a little growth potential. My view is that it deserves a higher price on account of the current dividend yield.  I had recently seen a detractor of the company rate it as a "strong sell", citing that "the company has never had a sale in twenty years". I take the opposite view on this little factoid: a company that hasn't needed a sale in the last twenty years must be in a pretty good business.

In conclusion: GAW is a company with a high dividend yield, excellent returns on capital, with a high unleveraged earnings yield. Directors have recently bought in, bolstering confidence in the likely sustainability of profits. It currently trades at a price to free cash flow of 7.4, although 2010 was an exceptionally profitable year.

1 comment:

Mark Carter said...

A 50% increase from the share price from 440p to 660p would seem feasible, assuming PBT of £15 for the foreseeable future. A re-assessment of GAW if it were to reach 600p would seem appropriate.