New Holding: Games Workshop, funded by sale of Faroe Petroleum

Games Workshop; (GAW.L, FTSE Mid 250, Market Cap ÂŁ978m, 3099p, 3.0% of JIC Portfolio and 0.0% of JIC Top 10)

New holding, funded by sale of Faroe Petroleum

There is a risk that by selling Faroe Petroleum now, that I will miss out on another 10p or so but equally there is the risk that DNO take control at the current 152p offer and I am left slightly in limbo. I think from here, I will make more money out of Games Workshop and am happy to book my profit in Faroe. 

I have added a 3.0% holding in Games Workshop to the JIC Portfolio

From its website,; what it does!

Our business model
“We have a simple strategy at Games Workshop. We make the best fantasy miniatures in the world and sell them globally at a profit and we intend to do this forever.
Simple, but every part of this statement is important.
We make things. We are a manufacturer. Not a retailer. We do have outlets in retail locations and these stores show customers how to engage with our hobby of collecting, painting and playing with our miniatures and games. They are the front end of our manufacturing business. If our stores do a great job, we will recruit lots of customers into our Hobby and they will enjoy spending their money on the products we make.
The products we make for our customers are the best in the wargaming world. This is because everyone at Games Workshop is passionate about our Hobby.
Every year we seek new and better ways of making our products and improving the quality. This is not simply a personal obsession; it also makes good business sense. We know that, for a niche like ours, people who are interested in collecting fantasy miniatures will choose the best quality and be prepared to pay what they are worth.
The games are a key part of both our Hobby and our business model. Our games are played between people present in a room (a Games Workshop store, a club, a school), not with a screen. They are truly social and build a real sense of community and comradeship. This again makes good business sense. The more fun and enjoyable we make our games, the more customers we attract and retain, and the more miniatures our customers want to buy. This in turn allows us to reinvest in making more and more exciting miniatures and games, which creates a virtuous circle for all.
We are also clear that we will only make fantasy miniatures, not historical ones. Fantasy miniatures from our own Warhammer and Warhammer 40,000 worlds allow us unlimited scope for product innovation. In addition, we can, and do, defend our intellectual property rigorously against imitators, thus ensuring that our worlds are synonymous with quality.
Our customers are global. People with our particular Hobby gene, that is collecting, painting and playing with fantasy soldiers, exist all over the world. Our job is to find them. In developed markets we like to do this ourselves through our own Games Workshop stores. Here we employ wonderful young men and women, who are recruited for their enthusiasm and willingness to help others. Our store managers are quite literally that: the centre for the Hobby in their local community and it is their behaviour and attitude that determine our success in that location.
Because it takes time and care to find the right person to run a Games Workshop store, it will take us many years to get the global penetration we want to achieve. So, in order to improve our coverage today, we seek out other businesses which can help us get to the places where our hobbyists may be found. The best businesses at helping us are independent shops, run by owners who know their customers and offer them a good personal service. We call these Stockists and we supply them with an easy to manage range of our fastest selling products, which we resupply every month.
For emerging markets in Eastern Europe and South America we work through experienced local distributors to ensure our product is available through their local networks of retailers. And, of course, in all these locations, we also have the Games Workshop Webstore, which gives customers a huge amount of information on the Hobby and access to our entire range of products with a fast and efficient delivery service to wherever they live in the world.
Finally, we know that if we want Games Workshop to be around for a long time, we have to deliver all this profitably. This is why we are cost conscious. We don’t spend money on things we don’t need, like expensive offices or prime rent shopping locations or advertising that speaks to the mass market and not our small band of loyal followers. We only invest where it makes a positive improvement to our business model, such as in tooling to make better plastic miniatures, in opening more Games Workshop stores to improve our customer service and in fit-for-purpose systems to make our processes more efficient and reliable. And when we make an investment, we measure its impact to ensure that it delivers an improved return on capital for our owners.
Our continual investment in product quality, using our defendable intellectual property, provides us with a considerable barrier to entry for potential competitors: it is our Fortress Wall. While our 400 or so Games Workshop stores which show customers how to collect, paint and play with our miniatures and games provide another barrier to entry: our Fortress Moat. We have been building our Fortress Wall and Moat for many years and the competitive advantage they provide gives us confidence in our ability to grow profitably in the future.
Even though we have been in the UK for over 35 years, we still see opportunities for growth here with smaller one man stores in market towns and suburbs of large cities. Compared to the UK, most of the rest of the world is for us still “green field” territory. This means we believe we can keep on growing steadily, using the same tried and tested approach of recruiting and retaining customers by opening Games Workshop stores, supported by the Games Workshop Webstore and independent Stockist accounts across the globe. With this growth we should be able to put more volume through our dedicated manufacturing and warehouse facilities ensuring that our gross margin continues to improve.”

My main hobby is investing; it’s what I enjoy doing and I admit to finding it quite difficult to understand why people are so interested in fantasy models and games, but they are. Each to their own. Games Workshop does a wonderful job at serving that market and has a very loyal customer base.

It is a Quality company in that it has operating margins of over 30% last year and boasted a return on capital of 87.1% and a return on assets of 58.8%. One might think that returns like that would leave it open to competition, but another Quality attribute of the business is its “moat”. A new entry into the market would have difficulty taking share from it; it has a very loyal customer base. It also owns much of its IP ensuring a high barrier to entry.

Why am I buying now? Value. The share price has come back around 25% from September’s high and has left it looking very attractive to me. On valuation it is valued at 17.1x current 2019 forecast and is on a prospective dividend yield of 4.2%. The dividend is well covered by earnings and free cash flow and the balance sheet has net cash.

It is valued at 20x free cash flow which looks attractive to me given its very high returns.

The Company is usually cautious in its guidance so a year ago forecasts for the current year ending 3rd June 2019 stood at just 136p, compared to last year’s 180p. (Last year’s results were helped by a new product launch making this year a tough comparable). As the year has progressed those earnings forecasts have been revised up a couple of times and now stand at 168.5p. I would not be surprised if they achieve last year’s 180p. Results for the half year ended 3rdDecember are due on 15thJanuary; we should get an update on Christmas trading then. I think further upgrades will lead to a decent move in the share price although, in my view share price appreciation from here is not dependent on that.

Sales in the current year are forecast at ÂŁ235m but it has nearly completed a capacity expansion at Nottingham which will increase capacity to ÂŁ350m per annum.

On Stockopedia it qualifies for three Screens: Martin Zweig Growth, Richard Beddard’s Nifty Thrifty (Value), and Quality Income screen. It has a StockRank of 92, comprising Quality 99, Value 32 and Momentum 89.

Conclusion: A quality stock at a decent valuation with good momentum in the business and seeing upgrades. I think it will perform well in 2019 and provide me with a decent income into the bargain. 

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