Cube Midcap Report (28 July 2020) – Games Workshop displays perfection

Cube Midcap Report (28 July 2020) – Games Workshop displays perfection

Good morning!

It’s a big day for updates.

I’ve decided to focus for now on:

  • Games Workshop
  • Greggs
  • Barr (A.G.)

Due to the sheer quantity of results updates, I think I should focus on writing this article today, instead of doing a live-stream. What do you think? Maybe I should run a poll!

In small-caps, I’ve published a premium article by Tony on Connect Group (CNCT). A brilliant analysis of the past and present, and of course some thoughts on the future of the company. Check it out!

Finished at 2.30pm.

Games Workshop

  • Stock data should display here.
Market cap £3.0 billion
RNS Annual Financial Report

Dividend declaration

Writer disclosure Long GAW.

This is a share I bought last November, thinking that it might be overvalued but that there was a bigger risk in not owning it. It’s sort of special, you see! So I bought a tiny stake.

This tiny stake has grown by 75% and Games Workshop is now 2% of my portfolio – still very small. I don’t regret adding it, even in a tiny size!

Despite the temporary closure of its stores thanks to Covid-19, it has powered ahead:

Crushing forecasts is what it does. Or at least, that’s the pattern in recent years!

Revenue is around the £270 million mark, as predicted in the mid-June trading update.

In that update, PBT for FY May 2020 was said to be “no less than £85 million”.

When most companies speak like that, you expect a PBT result of, say, £85.3 million.

The actual result is £89.4 million.

I would also draw your attention to the lack of adjustments made to the results in the above table. GAW isn’t massaging the figures for us. The only “adjusted” result is the constant currency result – which is something many investors want to know.

CEO comment:

“An amazing set of results – the best year in Games Workshop’s history, so far. You can once again see from these results that our business and the Warhammer hobby are in good shape. We look forward to the year ahead and will face any challenges head on and learn from our mistakes. We thank our staff and customers and other stakeholders for their continued support during these uncertain times.”

Strategic Report

This section always reassures me, when the CEO reminds us that they are in this for the long haul:

Our ambitions remain clear: to make the best fantasy miniatures in the world, to engage and inspire our customers, and to sell our products globally at a profit. We intend to do this forever. Our decisions are focused on long-term success, not short-term gains.

This section also notes that Games Workshop is an owner of intellectual property – a key ingredient that can make for a high-grade investment.

There is an emphasis on cash – a simple thing but perhaps more companies should reflect on it!

It’s working out well for GAW shareholders, in terms of dividend payments:

Finally, the company says that long-term success is measured by return on investment. Indeed, it is! And GAW’s ROCE scores are consistently brilliant.

The company’s own measurement of “Return on Capital” saw a decline from 100% to 94%. Needless to say, this is still superb.

GAW excludes royalty income from this calculation. So I think it’s fair to say that their calculation is in fact conservative.

I also note that ROC has been held back by increases in site investment – production capacity in Nottingham and a warehouse upgrade in North America. As these investments pay off in future years, ROC has the potential to climb again.

Key performance indicators – these are worth reviewing. They include financial and non-financial KPIs (i.e. customer and staff engagement).

Shareholder value – the company’s statements on this are perfectly in tune with my own thinking:

We believe shareholder value is created, primarily, by not destroying it. We have no intention to acquire other companies, nor to dispose of any of those we own.

Wonderful. I want organic growth. I don’t want companies generating enormous fees, enormous distraction and enormous waste by constantly buying and selling subsidiaries.

I don’t mind the occasional, well-reasoned acquisition. But the perfect company doesn’t need to buy or sell any businesses: it just grows itself. With fewer distractions, I think management teams might be better able to figure out how to do that!

The dividend policy here previously seemed quite random – excess cash was chucked out as it became available. Maybe that is in fact the optimal policy?

The company now says:

…in future, a working ‘cash buffer’ of three months’ worth of working capital requirement will be set aside before deciding how much cash is truly surplus for the purpose of declaring dividends.

Review of the Year

The company lost six weeks of sales and profit to Covid-19.

It’s a great achievement to only lose that much. It also shows how much they would have grown without Covid-19.

If the £90 million operating profit was effectively generated from 46 weeks of trading, rather than the full 52, then a 52-week performance would have been worth nearly £102 million in operating profit. That would have been growth of 25%.

Balance sheet – the £25 million overdraft with Santander has not been used.

The CEO speaks like a human being. This is so important:

How naïve was I to say last year ‘I do not see anything significant that will get in the way’? Looking forward I will ensure our operational plan is even more robust. We will continue to deliver on that plan, and at the same time invest in the potential sales growth. Our recovery plan is going well, but we are not taking anything for granted. 

The own-store opening programme has been paused for the time being, but online sales growth is excellent and there are thousands of independent stockists.

Manufacturing – GAW has a new, second factory whose output and features are still increasing. The original factory is being modernised.

Warehousing – capacity is being increased in North America with a £5 million investment. In the UK, a new property is being rented near the Nottingham HQ. In Australia, capacity is being reviewed as the company grows.

Full marks to GAW for introducing their capex table with the sentence: “This is what we have been spending your money on“. How many other companies think about their shareholders in this way?

Media and Entertainment – “We have made some progress, as expected it is a little slower than I’d like – hey ho.” A new TV project is being developed, based on Warhammer novels.

Licensing – 73 video game licences so far, and more every 2-3 months. The first Warhammer game in China was launched this year.

North America and Japan are a big focus – there’s a new deal with Marvel to publish comics.

The internal team, with the help of an animation studio, has also started producing an animated series. GAW is still deciding how best to distribute them.

Royalty income, the purest form of profit, was derived from PC/console games (72%), mobile games (13%) and other sources (15%).

Headcount is up from 2,110 to 2,188. Note the huge operational leverage, as a small headcount increase coincides with a big increase in profitability (before the impact of Covid-19).

Sales Analysis

This table illustrates what happened in the year: GAW’s own stores (“Retail”) suffered, but other stockists (“Trade”) and online sales helped to pick up the slack:

The number of stores increased from 517 to 531. In aggregate, the new stores generated a profit for the period – no long wait for them to start generating profitable sales.

Pageviews at the community website were up 30% and user numbers were up 40%. Astonishing.

My view

I haven’t got much more to add, except that this company is on an amazing growth trajectory and I’m quite relieved that I bought a few shares when I did.

Is it overvalued now? I guess so. The secret it out that it’s a special company, and making quick money here doesn’t look very easy.

I will say that on a pre-Covid basis, if we look at the FY May 2020 results and multiply them by 52/46 (since GAW thinks that it lost six weeks of sales activity), then the annualised pre-tax profit was more like £101 million.

We might also want to bear in mind the increased production and warehouse capacity that is coming online. And the rising royalty payments (which are unpredictable, but certainly appear to be on an upward trend, as the brand goes from strength to strength).

When you put all of that together, the £3 billion market cap is not so illogical. It’s not cheap, but neither is it crazy. Remember that we are talking about a company with unique IP and a fanatical, growing customer base which encompasses both children and adults.

As I said at the recent Mello BASH, I rate this a “hold”.



  • Stock data should display here.
Market cap £1.4 billion
RNS Interim Results
Writer disclosure No position.

I was a fan of this company in early March, just before the world ended.

The market cap is down by over a third since then.

Let’s see what happened in H1:

  • shops closed for most of Q2
  • weekly sales are now back to 72% of 2019 level
  • pipeline of new shops has slowed until clearer outlook

The financial result was awful, sales down massively, like-for-like sales down 49% and a £65 million pre-tax loss.

In these exceptional circumstances, I wouldn’t read too much into that.

What’s more concerning in my view is 1) the balance sheet impact, and 2) the potential for footfall to recover.

How many Greggs customers are now working from home, and less likely to walk past the shop? More than a few, I’m guessing. Although Greggs says its brand is “not materially dependent on office-based workers”.

Restarting – from July 2nd, all shops were open to takeaway customers. The new post-Covid measures have been implemented.

These measures aren’t cheap and the buying experience isn’t the same under social distancing. The product range has been reduced and service is slower (although the shops are less busy anyway, thanks to lower footfall around them).

Whilst we can be confident of our ability to operate under social distancing it is clear that sales will be constrained whilst these conditions prevail, with an observed impact on both our capacity to serve and on customer demand.  

Because of the lower product range, some staff remain on furlough. Will they be coming back from furlough, I wonder?

The company talks about growing once social distancing is no longer required. But how much longer will that be? I don’t see any particular end-date, since the “experts” are now talking about a second wave, and many of them don’t think we have natural immunity to this disease.

Greggs says:

We are unable to predict how long social distancing will be required but we remain confident of our potential for growth once this constraint is removed.

In the meanwhile, it is rolling out “click-and-collect” and delivery services nationwide.

Store estate – 20 shops opened, 45 closed. Total: 2,025. Small growth expected for the year as a whole.

Balance sheet thoughts

There was a nasty outflow of £102.5 million in Q2. In response, Greggs used the government’s Covid Facility to the tune of £150 million.

They are now looking for lenders who will enable them to repay the Covid Facility as quickly as possible, solving the balance sheet issue for the medium-term.

Net debt is thankfully small at just £26 million.

The financial position appears OK, assuming that lockdown doesn’t happen again.

Personally, I doubt that there will be another “full” lockdown. I was amazed when it happened the first time, so maybe I am too optimistic by nature?

For what it’s worth, my sense is that most governments, including the UK, are now more in favour of localised lockdowns and measures at the level of the individual, rather than blanket lockdowns.

If another lockdown happened and/or if trading was subdued on an ongoing basis, then:

…the Company would need to continue to access the liquidity available under its CCFF, or alternative facilities.  The Board is in discussions with commercial banks to establish additional facilities in the near term.  


Recent sales levels have allowed us to bring approximately 75 per cent of our colleagues out of furlough and we are trading broadly at operating cash breakeven.  As sales levels pick up, we will be able to bring more of our colleagues back from furlough; in the interim, we continue to be reliant on the CJRS to protect those roles.  Looking forward we expect that the business should break even in profit terms when it achieves sales around 80 per cent of the 2019 level.

(CJRS = Coronavirus Job Retention Scheme.)

The CRJS is due to end in October. Some form of extension would not surprise me, but the GRG employees still furloughed are definitely in a precarious position.

I also note that Greggs needs sales back at 80% of 2019 levels in order to break even. That’s a concern – I don’t see High Street footfall ever recovering to 2019 levels. “Click and collect” and delivery will have to replace the traditional sales which have been lost.

My view

I’m nervous about this one at its current market cap. I just don’t see how the 2019 result can be repeated any time soon (net income £87 million).

For me, this one only deserves a “normal” earnings multiple against earnings 2-3 years out.


Barr (A.G.)

  • Stock data should display here.
Market cap £493 million
RNS Trading Update
Writer disclosure No position.

This is an owner of drinks brands – most notably IRN-BRU.

I’ve thought about buying it before. It’s usually on my watchlist.

And I must admit that I’m tempted right now. It’s down well over 50% since last year.

Trading update – like so many others in the sector, it has suffered a loss from the collapse of “out-of-home” consumption of soft drinks. This is partially offset by increased purchases for at-home consumption.

On the more positive side, sunny weather during lockdown (April to June) helped to boost demand.

If I’m reading this correctly, sales in the hospitality channel were down 95% in Q2:

It certainly helps that hospitality started at only around 10% of revenues. Sales through Major Retail, a much larger channel, were up 10%.

The end product:

…revenue for the 26 weeks ended 25 July 2020 is expected to be c.£113m, a c.8% decline on the prior year (2019 : £122.5m).  For the 3-month period April to June, revenue declined c.12% against the same period in the prior year.

Market value share within UK soft drinks is considered to have stayed flat.

Outlook sounds reasonable to me. As noted above, I agree that there won’t be another significant lockdown:

Our current scenario planning, based on an underlying assumption that the UK will not enter into a further significant period of lockdown, suggests that our full year revenue performance for the year ending January 2021 will be in the region of 12-15% below the prior year, with a modest reduction in operating profit margin reflecting the impact of sales mix and operational de-leverage.

My view

I need to look into this again, but it is high up on my watchlist for a potential purchase.


There was too much to cover today. If news is quieter tomorrow and later in the week, I will circle back to check on some of these. Feel free to request coverage of the ones you’re most interested in:

  • Reckitt Benckiser
  • Virgin Money UK
  • B&M European
  • IG Design
  • Card Factory
  • Travis Perkins

Thanks very much – see you tomorrow!



PS: As always, I’d appreciate it if you smash the like button!



Wordpress (9)
  • comment-avatar

    Thanks Graham.  I wondered what you make of GAW at the current price?  I bought in last year but sold out again in a judiciously timed pre-Covid sell off of my portfolio.  I bought back in at the end of March at what now looks like an astonishingly bargain price of around £46 but then sold again in June when I started fretting about the sanity of the market’s rebound.  My accidental trading had fortuitously netted a decent return since my initial entry and when I read today’s results, I reminded myself just what an exceptional, in every sense of the word, company this is. I just want to own it at almost any price.  By looking at my net purchase price since my entry last year, I can easily console myself at paying the premium today but this could be almost anything in ten years time if they continue to execute with such outstanding aplomb.  Their IP is almost infinite.  This is by far the most exciting thing I’ve ever owned and the next time the market turns down, I’ll be reversing the truck!

    • comment-avatar

      Hi John! Well done! I also bought in the 40’s, and am glad that I did!

      Personally, I won’t be buying any more at the current price. As stated above, I rate this as a “Hold”. Plenty of exciting upside if things go well, but I wouldn’t yet have the confidence to bet my house on it!



  • comment-avatar

    Thanks Graham, I think I posed my question before you had finished your write up.  It is indeed overvalued for now at least!

  • comment-avatar

    Great, in-depth, write up on Games Workshop, thanks Graham.

  • comment-avatar

    Interested in Reckitt and I G Design

  • comment-avatar

    Re. GAW
    Hi Graham – superb analysis. I think we often do not give enough credit to management’s vision and ability to deliver on that vision. This CEO is worth his weight in gold.
    I had my eye on this share for a long time but it was never the right time. I picked up a technical signal at the end of April this year (share price exceeded all 3 EMAs, 50, 100 and 200) and bought a decent amount @ 5750.
    Very happy with the ride!

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