Video games hardware and software retailer GAME Digital’s (GMD) half year results are a real mixed bag.
The shares initially sparked up 8.3% to 26p in early dealings on the positive overall tenor of the outlook statement before settling at a bombed-out-looking 24p, valuing the business at just £41.5m.
GAME Digital insists ‘the positive market trends seen in the second half of the last financial year in our core console categories have continued throughout the first half of the current financial year’, its UK and Spanish markets ‘remain in strong growth so far this year’ and management is also upbeat about the group’s new relationship with Mike Ashley’s Sports Direct (SPD).
CASH CUSHION
For the six months ended 27 January, revenue crept up 3.9% to £517.4m, although adjusted profit before tax slumped 16% to £14.2m; GAME Digital did however finish the half with £85m cash in the coffers.
Liberum Capital, a buyer with a 65p price target, increases its year-end net cash forecast from £39m to £44m, which is actually more than the current shrunken market cap. Canaccord Genuity sticks with its ‘hold’ rating, yet downgrades its price target from 40p to 35p, explaining the pervading poor sentiment towards GAME Digital:
‘The shares have more than halved since the start of the year, reflecting negative newsflow across the sector as well as GAME’s high operational gearing. However, unlike many in the sector, GAME has strong year-end net cash as well as the financial support of Sports Direct and a hugely flexible store portfolio.’
The poor quality of GAME Digital’s earnings (it is exposed to the cyclicality of the console cycle) and concerns over fragile consumer confidence also weigh on investor appetite towards the stock.
IMPROVING PIPELINE
Strong revenue growth in new hardware, driven by the Nintendo Switch, and in events and esports, were offset by a drop in preowned software, though Liberum flags an improving pipeline of new releases.
GAME Digital explains that ‘strong demand for Nintendo Switch has continued to deliver growth to the overall market and consumer interest is expected to remain robust. Moreover, the expected future growth in the Nintendo software market should be supported by the expanding installed base and also by newly announced titles from established franchises including Super Smash Bros. and Pokemon.’
SPORTS DIRECT DEAL EXCITES
GAME Digital is ‘repositioning and right sizing the retail business’ while shifting from lower margin retail sales to high margin gaming experiences through its BELONG gaming proposition.
In February, the company inked a collaboration deal with sportswear giant (and 25.75% shareholder) Sports Direct, a tie-up that included plans to roll-out the BELONG gaming proposition across new locations including Sports Direct stores. GAME Digital now has 19 BELONG arenas up and running, with performance said to be encouraging.
‘The agreement with Sports Direct is a key strategic and financial step,’ insists Liberum, adding that ‘the latest performance of the arenas suggests they could generate up to £13m-£15m of recurring earnings before interest and tax (EBIT) per annum on a long-term view, if management’s roll-out target of 100 is achieved.'
CEO Martyn Gibbs insists: ‘The traditional retail landscape is under increasing pressure and we have developed a strong growth strategy to utilise the valuable components of our core business in building our new experience based gaming offer.'
