Results confirm that the sales recovery signalled in August has been fully realised in terms of profit delivery. The business transformation strategy is on track, and Game Digital is successfully developing future growth areas such as digital content, virtual reality, BELONG arenas, and tournaments. With significant euro exposure, and buoyant retail growth in Q1 of the current year, an FY18e EV/EBITDA valuation of 2.1x looks misplaced.
The second half saw strong trading recovery, led by the easing of the Nintendo Switch supply bottleneck that affected H1. After 36 weeks, Switch is confirming its significance, with UK and Spain market volumes heading for 3-4m units three years out, against 1.7m units of combined Xbox and PlayStation in FY17.
EBITDA met our £8.0m forecast on the Switch supply improvement. Content sales stabilised including 16.8% annual growth in digital content, showing Game Digital’s traction in new technology. Spain (37% of revenue) improved euro growth, further enhanced by FX rates. Gross margins reduced 60bp y-o-y on higher mix of new lower-margin products. Operating costs grew only 2.8% after £7.4m of UK savings. Led by strong unit sales of Switch and, very recently, the XBOX One X, total retail sales are up 5.4% for the first 15 weeks of FY18.
Game Digital (GMD) is energetically pursuing its strategic plan in four areas: retail, services, digital and efficiency. Standout FY17 achievements were: 18 BELONG arena openings (35 are targeted in FY18), and 49 renewed leases, 39 at improved terms. A further 221 lease events by December 2018 give management leverage.
GMD’s balance sheet is reassuringly strong, with net cash of £42.6m. The company has total facilities of c £86m.
With net cash of 25p per share, the market values the business at only 2.1x FY18e EBITDA, which appears inappropriate, even taking into account the execution risks still lying ahead. Although we have trimmed our FY18 EBITDA forecast by £1m, it still represents 54% year-on-year growth. Our valuation is a blend of three metrics: DCF, peer comparison and sum-of-the-parts, averaging 80p (previously 83p).