Gear4music’s continued market share gains in the UK, and triple-digit growth in Europe, give line of sight to a significantly larger business with enhanced investment returns. Institutional investors have demonstrated their confidence in the company’s growth strategy with the recent placing, but that has not been sufficient to address a market that continues to focus on higher value based on increasing market share.
G4M is on a path to major expansion. Its success in the UK, applying 21st century retail technology to disrupt a fragmented industry, is giving way to the prospect of a significantly larger presence on the continent. In FY17, European sales grew 124%, and G4M has opened distribution hubs in Sweden and Germany. Separately, it plans a US website, which should provide a platform for own-brand sales there. It is also acquiring a £5.3m freehold, catering for its medium-term head office needs.
G4M has funded additional growth opportunities by raising £4.2m before expenses through a placing of 610,000 shares. It plans to invest the proceeds in the IT platform, international expansion, supply chain development, inventory investment, further enhancement of the marketing offering, the fit out of the new UK head office and further development of the German and Scandinavian hubs. The directors also placed 839,000 of their own shares and the CEO, who retains 34.3% of the shares, has undertaken not to sell further shares for one year.
As the placing represents only a 3.5% increase in share capital, there is no material change to our forecasts.
The placing was oversubscribed at 690p and the share price continues to demonstrate significant investor demand. The market is clearly focusing on the European opportunity. Based on a multiple of 2x sales, typical of pure-play online retailers, the current share price implies only a 2% revenue share of a European musical instrument and equipment market valued at £4.3bn, compared with G4M’s 0.5% share now and its major competitor’s 14% share. In the UK, G4M has already taken a 20% share, growing that at around 5% pa over the last three years. Thus, for G4M to reach a 2% European penetration looks achievable, and any overachievement would give grounds for future upside.