Games Workshop’s (GAW) interim results are ahead of expectations. The highest rates of revenue growth were achieved in the channels with the highest operating margins, ie Trade (40% margin) and Online (64% margin). This has produced a strong improvement in free cash flow generation and ROCE has improved from 96% to 111%. We upgrade our forecasts for FY20 and FY21 by a further 3% following the 9% upgrade in November. Our DCF-based valuation increases by 11% to 5,748p.
GAW’s interim results highlighted growth in revenue of c19%, operating profit preroyalties of c 37%, and PBT growth of c 44%. Revenue of £148.4m and PBT of £58.6m compare to figures indicated for the interims, at the trading statement in November 2019, of not less than £140m and £55m, respectively. By channel, constant currency revenue growth was strongest in the highest-margin channels: Trade (revenue growth of c 24%) and Online (c 14% on an easy comparative of -3.6%) and was lowest in Retail (c 6%), giving a gross margin change y-o-y of 2.5pp to 69.5% and an operating margin change (pre-royalties) of 4.5pp to 32.7%. The drop-through of incremental revenue to gross profit was high at c 83%. Royalty income, likely to become a larger source of income over the longer term with the strategy of further exploiting brands, albeit likely to be lumpy and difficult to predict, grew by 94%. The higher operating margin, better control of working capital, and lower capex and investment (relative to sales) led to an improvement in free cash flow generation (relative to sales) of 19.6% in H120 versus 13.6% in H119. Cumulative dividend announcements so far in FY20 are 145p versus 155p for the whole of FY19.
Following upgrades of 9% after the trading update in November 2019, we upgrade our forecast PBT for FY20 and FY21 by 3% to reflect the H120 performance and now incorporate IFRS 16, which does not affect operating profit but adds a net interest charge of £1.2m in both years. IFRS 16 increases fixed assets and total liabilities by £29m.
The shares have performed strongly since the last trading update in November. Our DCF-based share price target increases by 11% to 5,748p given the forecast upgrades, improved cash flow generation and rolling forward the DCF.