Games Workshop/ GAW Buy @ 8760p MV: £2.77bn Employees: 2,110 Next figures: end July
My first ever recommendation in my newly launched publication, Quantum Leap, was Body Shop International. The shares went on to become one of my most successful recommendations. The first recommendation in the first ever issue of Quentinvest was Games Workshop and I have great hopes that they will also do exceptionally well.
They have been featured 13 times in Quentinvest so far, mostly at successively higher prices and are up 6.5 times on my original recommendation price. I believe they still have a long way to go.
As you can see above the chart is spectacular with a breakout in early 2017 from a massive base pattern. The chart tells us very clearly that something exciting began to happen at this business in that year.
Actually it happened in 2015 when Kevin Rountree replaced Tom Kirby as CEO but it took a while to show its effects. Kirby ran GW very cautiously with a close eye to costs. Rountree came up through the financial side of the business but as soon as he took charge he began to invest in a management team, which had not existed before. I am sure he did many other things but this shift to a dramatically more professional approach had a transformational effect.
Sales and profits exploded. The five year record, which I finally found buried in the small print of the 2019 annual report, shows sales and profits rising from £119m and £16.6m respectively for 2015 to £257m and £81.3m for 2019. Despite the coronavirus briefly shutting all the shops another increase is expected for the year to June 2020.
On the strength of this performance Games Workshop has not only stopped claiming assistance from the government but has said it will return all the assistance received.
My strong feeling is that Kevin Rountree is for Games Workshop like Six Alex Ferguson was for Manchester United. In his 26 years at Man U., Six Alex won 38 trophies. Rountree has only been five years at GW and I think he plans to stay and win many more trophies.
There is much going on at the company, which holds great promise for the future of what, if you think about it, is a very unusual and special business. GW is vertically integrated. It invents the games/ the hobby as it calls it, designs, makes and sells the figures and supports the resulting enthusiastic and growing community of fans around the world. It is a biggish fish in the UK but on a global scale the scope to grow looks enormous. Their potential customer base is every body with what they call the hobby gene, which is a lot of boys and young men and no doubt some girls around the world.
I googled the question and learned that there are 1.2bn adolescents in the world, which creates the basis for Games Workshop to become a very large business.
One of the things Rountree has done is take a more positive approach to royalty income. Kirby was famously cautious about the purity of the product. Rountree is too but sees more scope (a) for generating royalty income, which is almost pure profit and (b) taking a more holistic approach to promoting the hobby around the world.
In the latest still to be reported financial year royalty income is expected to be around £16m. The comparable figure for 2015 was £1.5m and the whole group only made around £16m in that year. My reading is that royalty income from say games using the group’s intellectual property is like being paid to do marketing for the physical products so a win-win.
It seems there is more to come on this front. The shares were climbing today because the group has announced plans to go into partnership with a highly regarded production company to make a TV series based on Warhammer 40,000, one of the group’s core fantasy worlds. This is obviously going to be made with all the quality and imagination that goes into the figurines and should be both a good earner in its own right and a great ambassador for the products.
This is a high stakes world we are talking about. GW has the right to make tabletop figures and games based on Tolkien’s ‘The Lord of The Rings’ but the TV rights belong to Amazon, which (a) paid $250m for them and (b) is spending much more again to bring the series to Amazon Prime some time in 2021. GW won’t be operating on that scale but I am sure they are doing this with real intent. They will likely also benefit from all the hoopla around Amazon’s production as well.
Other things GW is doing also seem exciting. They are having the first worldwide painting competition for which the prize is a sword, not any old sword but a sword forged in California by the same team of blacksmiths which has made weapons for Thor, The Last Samurai and The Hunger Games.
They are also doing something that really surprised me. Historically all Games Workshop figures are made in Nottingham to ensure product quality. They recently expanded the factory capacity for the first time in decades. Now they have announced a partnership with a Japanese company, Bandai, to develop two types of figures for worldwide distribution. This should add great flexibility to their production capacity and could help with addressing massive Far Eastern markets.
Currently sales are overwhelmingly dominated by Europe and North America, which are roughly equal in size with the UK subsumed into Europe. The whole of Asia makes sales similar to Australia and New Zealand but I would have thought this hobby could have huge appeal to Asian teenagers. If they could start to crack that market that would be very exciting.
In summary, I think Games Workshop, led by Kevin Rountree and team with 40 years of intellectual property under their belt and the creation of a fantasy world to be mentioned in the same breath as The Lord of The Rings, is an exciting business with huge potential. A fun fact about Games Workshop is that their return on capital is 100pc, described in The Daily Telegraph as the highest figure they had ever come across. It clearly provides a great basis for investing, when you are earning those kinds of returns.
Games Workshop for me is the epitome of a high quality business. As one fund manager noted – good things happen to good quality businesses, bad things happen to bad ones. GW should be well placed.