We flagged fantasy miniatures maker Games Workshop (GAW) in June 2022 at around £63 after the shares had halved in the prior nine months, arguing they rarely traded as cheaply.
The shares have since retraced the lost ground but still sit just below all-time highs of around £120 and effectively have gone sideways over the last year. Meanwhile the business has not stood still, throwing-off more than £10 in dividends per share as sales and free cash flow per share have grown by more than half.
We believe the shares are set to break new ground, driven by the next growth phase of the business as the company looks to put the post-pandemic costs and logistics challenges firmly in the rear-view mirror.
Intriguingly, for the first time in over a year, analysts appear to be revising up their 2026 earnings forecasts, which could portend the start of a sustainable trend supporting further share price gains.
In other words, Games Workshop could be back to under-promising and over-delivering, a feature which has characterised management in the past.
WHY WE STILL LIKE GAMES WORKSHOP
Games Workshop is a unique asset. The company has arguably under-exploited the IP (intellectual property) it owns, and, unlike real life characters, there is no limit to the future growth of the fantasy worlds it brings to life.
We like the straightforward strategy: ‘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.’
Globally, the business has barely scratched the surface of the total market opportunity. One of its underappreciated routes to market is the stores, operated by enthusiastic hobbyists which, attract other hobbyists eager to learn how to play, paint and collect fantasy soldiers.
Games Workshop is vertically integrated, which means it controls the whole process from design creation of the miniatures through to tooling, manufacturing, distribution, and sales. Crucially, this means it controls the pricing of its products and can optimise its costs more efficiently.
The Warhammer-community.com website and dedicated Warhammer tv channel are key assets and drivers of brand awareness and sales growth.
All these characteristics add up to some impressive financial metrics. Return on equity and capital employed (the company does not have any debt) have averaged 63% over the last six years.
Operating margins have averaged 36% per year and the business throws-off oodles of free cash flow which has grown by around 26% a year. Truly excess cash is given back to shareholders via dividends which have grown at a compound annual rate of 33% a year.
In short, Games Workshop is a quality compounder which we believe is well positioned to become a bigger business over the next decade.
STEP-UP IN MONETISING IP
The tie-up with Amazon(AMZN:NASDAQ) announced in December 2023 to create a Warhammer 40K film and tv series, and associated mechandising rights, is approaching its self-imposed deadline of 31 December 2024 to agree ‘creative guidelines’.
In its 2024 annual report, Games Workshop said the agreement with Amazon includes an option for Amazon to license equivalent rights in the Warhammer Fantasy universe following the release of the initial Warhammer 40K production.
It has been reported that Henry Cavill, the British actor known for his roles in fantasy films such as Superman and The Witcher and a huge fan of gaming, is set to star in the tv series for Amazon Studios.
There is a lot riding on the success or otherwise of the Amazon deal, which admittedly creates room for disappointment.
The Paramount+ tv adaptation of the hugely-popular Halo games franchise didn’t go down at all well with fans and was axed after just two series.
On balance, however, the risks appear to be skewed to the upside for Games Workshop.
Analysts at Jefferies estimate a 10-part series could net Games Workshop around $10 million (£7.7 million) in royalty income. For context, it earned £31 million of royalty income in the year to end of May 2024. This income is close to 100% profit.
More important, says Jefferies, is the brand exposure, which could create a significant downstream effect on miniatures revenue.
‘Given Amazon has previously reported circa 200 million Prime members streaming shows/movies, the potential for Warhammer to build its global exposure is clearly a huge opportunity,’ writes Jefferies.
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