Games Workshop (GAW), the global leader for tabletop miniature gaming, has bucked wider consumer trends and delivered a third consecutive year of record sales and earnings growth in FY19. The company is proactively exploring new ways, such as the development of digital content, in which to leverage its rich intellectual property and introduce the Warhammer hobby to new audiences globally. Our modest forecast assumptions, which have not materially changed, drive a DCF valuation of 4,703p.
GAW reported FY19 sales growth of 15.9% (15% constant currency) and a 9.5% increase in pre-tax profit, comfortably ahead of closing guidance (sales of c £254m; pre-tax profit not less than £80m). This represents c 70% earnings CAGR since FY16. Dividends of £50.3m (155p per share) were paid during FY19, leaving net cash of £29.4m at year end (2018: £28.5m). A further 30p dividend has been declared alongside the results announcement, to be paid on 13 September 2019.
GAW continues to leverage its rich intellectual property (IP) via relationships with the major digital gaming publishers. Royalty income rose by 18% to £11.4m in FY19, with almost 90% derived from PC and console games. Additionally, GAW has taken early steps to develop its extensive narrative and characters in animation and TV. It announced a development agreement with Big Light Productions earlier this month.
We maintain our potentially overcautious FY20 assumptions for c 5% growth in both trade and retail sales and a 0.5% increase in online, consistent with our assumed retail like-for-like. We assume 25 net new stores openings, mainly in the US and Germany. We factor in a 50bp increase in gross margin and broadly flat operating costs as a percentage of sales and royalty income. We extend those assumptions to FY21, resulting in a modest c 5% y-o-y increase in PBT.
The shares have risen by c 40% since we initiated in April and trade slightly below our DCF valuation of 4,703p, which reflects revised, but still modest, assumptions (see valuation section). The shares merit a premium to the implied peer groupbased valuation of 4,270p. Combining the two valuations gives a blended valuation of 4,486p (previously 3,935p). We forecast FY20 net cash of £41m, underpinning a healthy c 4% yield and scope for further distributions.