It's time to buy Games Workshop shares, why?

Games Workshop, a British company that owns the popular Warhammer IP, has been walking a valuation tightrope in recent months.

The success of the franchise, together with the regular return of surplus cash to shareholders, caused the group to trade at high multiples. However, when supply chain problems (the so-called container crisis) arose, the market entered a slow but damaging reassessment phase.

In the second half of the Last year, Game Workshop lost about 25 percent of its value, but there are positives evident in the strong half-year results that suggest it could rebound quickly when business interruptions subside.

First of all, it must be said that Games Workshop Group is a multinational company of British origin dedicated to producing board games and modeling. It is especially devoted to the edition of the so-called “wargames”. In fact, it is one of the most relevant companies in this field on the entire planet. Listed on the London Stock Exchange.

Games Workshop shares: buy or sell ?

Games Workshop Group revenue increased slightly compared to 2020, but the problem is that pre-tax earnings fell 3.7 percent due to the increase of shipping costs and wage inflation.

Input and transportation costs increased by 5.6 million pounds ($7.7 million), while Staff costs increased by £3m due to an increase in both wages and headcount.

Management ensures that once these costs are eliminated, plus the movement of Forex, earnings are broadly in line with last year’s record figures. While wages rarely do more than keep rising, shipping costs may soon normalize.

Without shipping costs, gross margin would have fallen just three percentage points a year. 73 percent, rather than the reported drop of six percentage points.

These issues are largely operational issues beyond management’s control.

Warhammer metric works well

The real value of Games Workshop is based almost entirely on the popularity of its Warhammer IP and there are many metrics that suggest this is working fine.

Warhammer-community.com users increased by 15 percent percent across all territories, while The Age of Sigmar’s July 2021 release was “the best fantasy release to date by a sizable margin.”

Royalties received on your IP more than doubled in the period to £20.1m and several major video games are due for release in 2022.

The pandemic has accelerated demand for games and if game releases year are successful, then it should lead to a further increase in royalties.

It also increased its licensing team with more staff in North America, Japan, and China.

FactSet consensus is for free cash flow to rise to £161.5 million by 2023, giving it an impressive 2023 free cash flow return of 5 per cent .

Any retail business that can continue to generate record sales despite a global pandemic deserves investor attention, particularly given regular capital returns.

This little setback is a good time to buy Games Workshop shares.

Games Workshop and the story of Ian Livingstone

A color fact is that Ian Livingstone, the writer and businessman co-founder of Games Workshop, received last week the title of knight of honor of the Queen of England.

In the argument of why Livinstone was deserving of the award, it is explained that for his services to the online video game industry.

The writer founded Games Workshop in the 1970s together with John Peake and Steve Jackson.

The company grew by publishing Dungeons And Dragons in Europe, and later achieved widespread success with Warhammer 40,000, Warhammer-Fantasy and other miniatures board games.

In parallel, he managed to generate a wide community with the edition of White Dwarf magazine (where Livinstone wrote and edited).

Currently, it is part of Sumo-Group (the parent company of Sumo-Digital) and HiroCapital, a venture capital firm focused on video games, the metaverse, esports, web 30 and fitness with a gaming format.