Investors seeking a Brexit-busting growth stock in the smaller companies space should tune into online musical instruments purveyor Gear4music (G4M:AIM). UK consumer confidence may yet be rocked by Brexit but Gear4music is growing like topsy on home turf and in Europe. Panmure Gordon’s 200p price target implies sweet-sounding 33.3% upside at 150p.

Founded by former sound recording engineer Andrew Wass in 2003 and operating out of an office, showroom and distribution centre in York, Gear4music is the largest UK-based online retailer of musical instruments and music equipment. Selling own-brand instruments as well as premium third party brands such as Fender, Yamaha and Gibson, this disruptive retailer offers a play on the shift towards online retailing in a fragmented musical instruments market with an expanding product range encompassing everything from kazoos costing less than a quid to high-ticket digital pianos, drum kits and guitars.

Gear4music made all the right noises with its AGM trading update (29 Jul), CEO Wass reporting 66% growth in total like-for-like sales to almost £13.8 million for the four months to June and arguing Gear4music is ‘well positioned to take advantage of the short-term export opportunities created by the UK’s EU Referendum vote’. Whereas UK sales grew an impressive 44% to almost £9.1 million, European sales rocketed 137% higher to £4.7 million.

Shares believes Gear4music is still at an early stage of growth, its proposition snaring market share from competitors amid an ongoing structural distribution shift to selling instruments and equipment over the web. Encouragingly, growth is broad-based across brands, product categories and territories. Gear4music is reaping the benefits of investment in multi-lingual, multi-currency websites in 19 countries. European sales stormed 191% higher in the first full week following the Brexit vote, aided by the plunging pound, and now speak for 34% of the top line; this proportion should rise with a first European warehouse set to be up and running in time for Christmas.

Given the growth rates being delivered, forecast risk looks firmly to the upside. For the year to February 2017, Panmure Gordon forecasts pre-tax profits will more than double to £1.5 million on £48.7 million turnover, ahead of £2.7 million off a top-line £60.3 million by February 2018. While Gear4music trades on 25 times this year’s 6p earnings estimate, the multiple drops to 14.2 times based on the 10.6p factored in for the following year, a reasonably inexpensive rating for a structural growth story.

With Gear4music sounding all the right notes, we’re bullish at 150p.

SWOT ANALYSIS

STRENGTHS

• Disruptive operator in niche market

• Well-invested online platform

• Best-in-class service and delivery

WEAKNESSES

• Punchy PE rating

• No dividend yet

• Limited free float

OPPORTUNITIES

• Growth in £4.3 billion European market

• Extend product range

• Open London showroom

THREATS

• Key man risk (CEO Wass)

• Potential for rising carriage costs

• Inventory management and security