A profit warning in January, a positive update in April. That's the story at Games Workshop, and the latest news has lifted the company's shares by 12%.
The retail group, which specialises in table top battle games including one based on Lord of the Rings, said it had traded strongly in the four months to last week, and as a consequence full year profits were likely to be ahead of current market expectations. Cash generation remains healthy and so it has declared a 20p a share dividend. Part of the reason for the improvement is a spate of cost cutting, including restructuring its retail outlets with more one-man stores, relocating its north American sales office and closing a model making plant in Shanghai, as well as investment in its online development.
These improvements took longer to come through than expected, but the company appears now be seeing the benefits.
Games Workshop is currently 45p higher at 415p, and in a buy note analyst Charles Hall at Peel Hunt said
We are upgrading our 2011 estimate by 25%, as the gross margin and cost reductions are higher than expected and restructuring charges lower than anticipated. In addition, cash balances have risen, and this has enabled the company to accelerate dividend payments. We were previously forecasting a 25p payment for the final dividend – we now expect a total payment of 30p.
Games Workshop has never been in better shape operationally and we should see a return to sales growth. The company has excellent long-term potential, given the global scope of the business, high margins and strong cash generation. The company has committed to returning truly surplus cash to shareholders each year – the 30p dividend would deliver an attractive yield of 8%.
