What a joy to it is to be a business owner of Games Workshop!

Despite the closure of retail stores, GW reported excellent 1H 2021 results with revenue up 26% and gross margin expanding to 75% on the back of the higher volume. Net income reached an all-time high of GBP 73.9m and net margin improved from 39.5% to 49%.

The margin expansion has driven by operating leverage.

GW CEO, Kevin, reported that “operating profit – pre-royalties receivable – both value (up £35 million to £83 million) and profit to sales ratio (up 12% to 45%) have improved in the period. Our high margins are delivering incremental profit compared to last year at 91% (2019: 55%).

91% incremental margin!

In the long run, the margin should shrink a little as they reinvest into their business especially as they have so many avenues of investment to drive future growth. It is not reasonable to expect GW’s margin to expand at its current rate, and I would rather them aggressively reinvest back into its core businesses.

China got a special mention from Kevin:

“An extended range of core products have now been certified for China Compulsory Certification (CCC) and have been available in the country. With Space Marines proving to be more popular than ever, we have enjoyed success in stocking and selling selected complementary licensed products within our own sales channels, key amongst which have been some action figures. These are also stocked in mass-market locations, helping us with brand awareness. We are expanding our translation team to ensure our customers in China and other overseas countries can enjoy the official Warhammer experience.”

I have been in close contact with the Chinese Warhammer community and translation quality is atrociously bad! I have no doubt that when they finally fix their China operations, it will provide the next leg of revenue growth. China is a huge market and I know Warhammer IP appeals to Chinese fans as much as it does in the UK and US.

A slight disappointment is to see the royalty income decline from GBP 10.7m to GBP 8.7m. But royalty income is going to be chunky. With the Warhammer IP is going from strength to strength (TV series, animation and comic), it would ultimately be reflected in the royalty income at some point. Not to mention a strong pipeline of Warhammer game in 2021 and going forward.

In the long run, GW’s intrinsic value is driven by 1) the number of fans and 2) revenue per fan.

GW is a vertically integrated entertainment franchise that has historically monetised through miniatures. In the last few years, it expanded its fan base through better marketing on social media and better product campaign. Going forward, it is also exploring new ways to grow fan base through TV series, animation and comic. Not only is the fan base growing, it is also increasingly able to sell its fans more products such as mobile games.

So we are seeing both the fan base and revenue per fan growing for GW. In the next few years, this will prove to be a very potent combination!

Investment action: Adding 1% @ current market price