Computer games retailer Game Digital’s (GMD) growing momentum in the second half of its financial year and confidence that strong trading will continue has investors keen to buy but many analysts remain cautious.
Shares in the company have surged 36.4% to 33.5p this morning as the company says demand for Nintendo Switch, the upcoming launch of Microsoft’s Xbox One X and new games releases will keep its momentum going.
Revenue in the UK and Spain has risen 8.8% and 15.7% in local currencies in the 26 weeks to 31 July 2017. Total sales at Game have jumped 6.8% over the same period and full year revenue is anticipated to hit £780m. This is lower than the £822.5m posted in 2016.
WHY ARE ANALYSTS CAUTIOUS?
Canaccord Genuity’s Sanjay Vidyarthi is cautious on the stock although he flags that strong peak trading and the planned asset disposal could allow Game to invest faster in its e-sports division.
Game is considering ‘strategic options’ for its digital division Multiplay, which it bought for £20m in 2015 and where it has boosted sales from £4.5m at the time to £13.5m.
The analyst says the company could sell the division for a three to five times sales multiple and invest the funds into its e-sports and gaming arenas business, BELONG.
He is also optimistic about the company’s year end cash position of £47m, driven by strong working capital management.
Vidyarthi says this translates into net cash of £42m, beating his previous forecasts of £31m.
Elsewhere, Liberum’s Adam Tomlinson highlights the UK retail market returned to growth in the second half at 8.8% thanks to the Nintendo Switch, but is still 6.8% down on a full year basis.
He concedes that Game has a ‘significant opportunity’ to redefine its retail footprint and cost base that can preserve cash and allow future investments in the business.
STILL BEARISH
We have been bearish on the retailer since it returned to the stock market three years ago, flagging its inconsistent sales that are dependant on console and software releases.
At the end of June, the company delivered a profit warning due to difficult trading on the high street.
While the video games specialist has been keen to take advantage of the hype surrounding the Nintendo Switch, it has suffered setbacks through a lower than anticipated supply.
Game is expected to deliver pre-tax profit of £2.6m in the year to 31 December 2018.
