Interactive Investor

Games Workshop shares: why this update triggered a slump

This company has been a fantastic investment for many, but today’s trading update had some of them running for the hills. Our City writer explains why the share price just dived 10%.

7th December 2023 13:53

Graeme Evans from interactive investor

The makings of another record-breaking year by Games Workshop (LSE:GAW) failed to keep sellers at bay today as the FTSE 250-listed shares shed their 8% gain since early November.

The reversal came despite in-line trading, with management of the Warhammer hobby business guiding towards half-year profits of not less than £94 million compared with £83.6 million the previous year.

Dividends paid and declared in the six months amounted to 195p a share, representing an outlay of £64.2 million compared with £54.2 million the year before.

The company’s policy is to keep a buffer of three months’ worth of working capital and six months of future tax payments before deciding how much cash is “truly surplus” for dividends.

Shareholder payments declared in 2022-23 were a record 415p, up from 235p the previous year as core sales lifted 15% to an all-time high of £445.4 million.

Profits set a new landmark of £170.6 million and earnings per share topped £4 for the first time, despite significant external cost pressures.

The annual report in July explained: “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.”

The shares reached 11,700p in the summer and 11,500p on the back of September’s stronger-than-expected first quarter update, when sales benefited from June’s release of the 10th edition of Warhammer 40,000.

They retreated below 10,000p the following month before staging a recovery in recent weeks.

Source: TradingView. Past performance is not a guide to future performance.

Core sales growth in today’s first-half update slowed from 14% in the previous quarter to at least 10.7%, but house broker Peel Hunt said this was consistent with its expectations for growth of around 7% over the remainder of the financial year.

Today’s City jitters also reflected a fall in Games Workshop’s licensing revenues to about £12 million from £14.3 million the year before. However, Peel Hunt pointed out that royalties can be volatile due to uncertainty over the success and timing of customer games launches.

The broker described today’s update as “positive” as it reiterated a “buy” recommendation and price target of 12,000p. The stock fell as far as 9,224p in the first hour of today’s session before attracting buying interest in a recovery back to 9,775p.

At the opening bell Games Workshop was the sixth-largest company in the FTSE 250 index, with its £3.5 billion market capitalisation on a par with British Land (LSE:BLND). At lunchtime Thursday, it had fallen out of the top 10 at less than £3.2 billion.

It joined the stock market three decades ago and has soared in value on the back of eight consecutive years of growth.

Part of the company’s success has been the strength of its digital offering, which chief executive Kevin Rountree said recently had “never been richer” as social media channels unite thousands of Warhammer hobby enthusiasts every day.

He added: “Our stores are filled with staff who have extensive Warhammer knowledge, build local communities, and offer Warhammer hobby guidance and support. It is an essential and unique customer service offer that we are proud of.”

More than three-quarters of sales now come from outside the UK, but with two main factories, design studios and back office support functions all based in or near Nottingham. It has two major logistics hubs in Memphis, Tennessee, and Sydney, Australia.

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