Warhammer stock Games Workshop fights back after fresh plunge

Shares neared a 15-month low in early deals, but City bulls think they’re worth much more than this. Here’s why.

Games Workshop (LSE:GAW), the Warhammer fantasy miniatures firm popular with retail investors as well as fund manager Keith Ashworth-Lord, continues to be surrounded by stock market sellers after its latest update failed to ease worries about cost pressures.

Even though sales are still growing, shares fell by over 8% at one point Wednesday in a continuation of the trends seen since topping 12,300p for a valuation above £4 billion in September.

The FTSE 250-listed stock dipped as low as 8,900p today, a drop of 28% from its peak, unwinding a recovery in the past fortnight as investors eyed stocks where tighter Covid-19 restrictions might prove beneficial.

However, sentiment improved as today's session wore on, with shares later just 1% lower at 9,695p after house broker Peel Hunt reiterated its price target of 12,500p and increased its full-year profits forecast by 3% to £150 million.

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The City firm described the 5.5% growth in sales at constant exchange rates as exceptional, particularly in light of testing comparatives and Covid disruption in the six months to the end of November.

Analyst Charles Hall said: “Shipments have been delayed, and the retail channel remains affected by restrictions in various countries. So to produce healthy sales growth is a major achievement and demonstrates the appetite for the hobby.”

Another positive development for Peel Hunt concerned the jump in royalty income from £8.7 million to £19 million, driven by significant computer game licensing deals with Nexon.

The Japan and South Korea-based company is among the world's 20 largest video games firms, with major franchises including KartRider and Dungeon Fighter. The partnership goes beyond just boosting licence income as it should also broaden Warhammer's profile in Asia.

Games Workshop said its profits will be no less than £86 million in the six-month period, which compares with £91.6 million the previous year.

The downturn reflects the pressure on the firm from foreign exchange, increased carriage costs and the costs of paying more to its staff. Peel Hunt expects freight costs to be up by £10 million across the financial year but thinks currency headwinds are moderating.

The company has set aside £6.9 million to pay a December cash bonus of £2,500 to each employee and has so far declared dividends of 100p a share in this financial year, up from 80p a share last year. The latest 35p a share award will be paid on 5 January.

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The shares have a strong following and are a top holding for UK investors through funds such as the Baillie Gifford UK Growth Trust (LSE:BGUK) Trust and Keith Ashworth-Lord's CFP SDL UK Buffettology fund.

Games Workshop accounts for about 7% of the latter's portfolio, dealing a blow to its net asset value after weaker broker sentiment sent shares sharply lower in October. 

They were changing hands at 500p five years ago and 4,100p at the height of the pandemic sell-off in March 2020, but have surged on the back of continued international expansion.

As well as warehouse and distribution operations at its Nottingham HQ, Games Workshop has two major logistics hubs in Memphis, Tennessee, and Sydney, Australia, serving the 77% of company sales now generated outside the UK. Products sold through 5,400 independent retailers in 73 countries account for 55% of business.