Another interim results record

GAW reported strong revenue growth for its core (constant currency + c 16% y-o-y) and licensing (constant currency + c 160%) activities in H125, the latter being boosted by the exceptional performance of the video game Warhammer 40,000: Space Marine 2. The high operating margin for licensing income (93% in H125) provided a big boost to the group operating margin (42.1% in H125 versus 38.2% in H124), as did the improved profitability of the core (36.4% in H125 versus 35.4% in H124). The higher absolute core profit versus H124 is noteworthy given the relative scale of its two main IPs: 40K is larger than AoS.

FY25 and FY26 estimates increased

Our FY25 revenue and profit estimates increase by c 2% and c 5%, respectively, and by c 1% and c 2%, respectively, for FY26. We assume a similar absolute level of core revenue in H225 as reported in H125 and limited incremental licensing revenue, giving an overall year-on-year decline at the group level in H225. For FY26, we model limited core revenue growth following the major releases of 40K in FY24 and AoS in FY25, albeit FY26 will continue to benefit from follow-on sales of new products for each of these releases. We also assume a ‘normalisation’ in high-margin licensing revenue following the strong performance in FY25 and FY24, which provides a headwind for growth. Our FY25 dividend estimate increases to reflect the ‘one-off’ benefit from the Space Marine 2 video game, but we retain our prior FY26 estimate.

Valuation

GAW’s prospective EV/sales multiples for FY25 and FY26 of 8.0x and 7.9x are at a premium to its average multiple of 7.0x from FY20–24, and prospective P/E multiples of 28.4x and 29.3x are at a premium to the average multiple of 23.3x. In our report we look at the sensitivity of GAW’s valuation to the potential incremental income from the licensing agreement with Amazon.

Strong growth from core and licensing

Record H1 results

H125 represented GAW’s best-ever H1 performance, with year-on-year revenue growth in the 26 weeks ended 1 December 2024 (versus the 26 weeks ended 26 November 2023) of c 21% to £299.5m, operating profit growth of c 33% to £126.1m and similar growth in PBT to £126.8m. Underlying growth rates were higher than reported figures as foreign exchange translation diluted revenue growth by c 2% and operating profit by c 6%. The launch of the fourth edition of AoS in July 2024 drove core’s c 16% constant currency revenue growth, while the phenomenal c 160% constant currency growth in licensing revenue was due to the success of the video game Warhammer 40,000: Space Marine 2. To put the licensing performance in perspective, at £30.1m in H125 it was just 3% below GAW’s highest-ever licensing revenue in a full year (FY24) of £31.0m.

The financial characteristics of licensing, which has a 100% gross margin with limited associated operating costs, results in a high operating margin (93% in H125) versus core’s (36.4% in H125) and can drive large changes in profitability at the group level, depending on the absolute changes in licensing revenue between reporting periods. In H125, the strong relative growth from licensing revenue versus core resulted in a strong increase in the group operating margin to 42.1% from 38.2% in H124.

By distribution channel, core’s revenue grew at greater rates in trade (24.3% at constant currency) and retail (13.3%) than in online (decline of 4%) as the latter had a strong comparative, particularly in Q124, on the release of the 10th edition of Warhammer 40K.

Trade revenue growth was driven by the ongoing increase in the number of accounts that GAW supplies, which has increased by 300 since the end of FY24 or by 500 since the end of H124, the latter being equivalent to c 7% y-o-y growth, and implying underlying growth from the individual accounts on average.

Retail revenue growth was helped by the addition of five net new stores in the period, equivalent to c 3% y-o-y growth in the number of stores versus the end of H124, implying a good underlying increase in revenue per store, on average. Management specifically referred in its narrative to record levels of retail sales in the UK, North America and Continental Europe, to which we would add that Asia was also at an all-time high at the interim stage. GAW’s retail revenue from Australia and New Zealand remains below prior peak levels, however management noted encouraging improvements in Australia, where the company is transitioning to a new leased warehouse that should be fully operational in H225.

GAW’s core gross margin declined by c 190bp to 67.5% versus H124’s 69.4%, as shown in Exhibit 3. The most significant drivers to the reduction in the core gross margin in H125 were: 1) an increase in the inventory provision due to some new products selling below planned levels; and 2) an increase in the amortisation of development (ie design) costs following the investment in development ahead of the release of new editions. The lower gross margin in H125 versus H124 and FY24 is consistent with the typical trend of a lower gross margin in the year of the launch of a new edition of AoS (eg FY25) than in the year of a launch of a new edition of 40K (eg FY24), as discussed in our October 2024 Outlook note.

While the core gross margin has varied, core operating costs have been well controlled, declining relative to core revenue in H125 versus H124 and therefore providing a good support to core profitability. Growth in staff costs, typically investment in new roles to support the growth, along with pay reviews and profit share to reward staff for the company’s operating and financial success have represented the most persistent pressure on costs, as shown in Exhibit 4. In H125, marketing spend was lower due to the phasing of expenditure that is likely to be spent in H225.

In line with its policy of distributing ‘truly surplus cash’ GAW has declared four dividends worth £4.20 per share so far in FY25, including two dividends (£1 per share and 85p per share) in H125 and two dividends (80p per share and £1.55 per share) post the period end. These take the cumulative dividends in FY25 to handsomely above the cumulative dividends of £3.15 per share at the same stage in FY24, and in line with the total dividends declared for the whole of FY24. The higher cumulative dividends in FY25 partially reflect the success of the Warhammer 40,000: Space Marine 2 video game, which was ‘earned income’ (versus ‘guaranteed income’) in H125, for which the cash is typically received in the financial year it is reported. The reported licensing revenue of £30.1m included c £26m of earned income, which was c £20m higher than the £6m recognised in H124, equivalent to c 60p per share of incremental revenue. To reflect this ‘unexpected’ benefit in FY25 we have increased our dividend estimate for FY25 by 50p per share to £4.70 per share, while retaining our FY26 forecast of £4.20 per share.

Cash flow and balance sheet

In absolute terms, GAW generated free cash flow, pre net interest payments and after repayment of the capital element of finance leases, of £76.8m, equivalent to 25.6% of total revenue (vs H124’s £82.2m, 33.2% of revenue). Beyond the changes to profitability discussed above, the most significant change to GAW’s cash generation was a working capital outflow of c £19m in H125 versus an inflow of c £2m in H124. Here the chief culprit for the working capital outflow was the increase in the trade receivable for licensing to £47m from £24.8m at the end of H124.

By the end of H125, GAW’s net cash position excluding IFRS 16 liabilities (£46.4m) had increased to c £126m from £108m at the end of FY25. As highlighted above, post the period end the company declared two dividends that totalled £2.35 per share, equivalent to a cash cost of c £75m.

FY25 and FY26 profit estimates upgraded

We have upgraded our revenue and PBT estimates for FY25 and FY26 to reflect the strong H125 results. Our FY25 revenue and profit estimates increase by c 2% and c 5%, respectively, and by c 1% and c 2%, respectively, for FY26.

We assume a similar absolute level of core revenue in H225 as reported in H125 and limited incremental licensing revenue, giving an overall year-on-year decline in group level in H225. Management indicated trading continued to be strong after the period end with core revenue growth of 12%, its best-ever December. We also remind readers that H224 included an extra week of trading versus H225 as FY24 was a 53-week accounting period. We expect a lower core operating margin in H225 given the inflationary pressures indicated by management and other increases, such as higher marketing spend, versus H125. For FY26, we model limited core revenue growth following the major releases of 40K in FY24 and AoS in FY25, albeit FY26 will continue to benefit from follow-on sales of new products for each of these releases, and at present there is no indication about other releases that may be made in FY26. We also assume a ‘normalisation’ in licensing revenue following the strong performance in FY25 and FY24, which provides a headwind for profit growth versus FY25 given its high operating margin. As indicated above, we have increased our FY25 dividend estimate to reflect the performance of the Space Marine 2 video game but retain our prior FY26 estimate.

Valuation

DCF valuation

Historically, we have generated a discounted cash flow (DCF)-based valuation using estimates for long-term revenue growth for the core business and the assumption licensing income, for which there is limited visibility, grows in line with the core, using the broad assumption licensing revenue will follow the growth in the company’s IP and customer base. We also assumed the company will demonstrate the same level of operational gearing (ie conversion of incremental revenue to incremental profit) and the company will require the same level of incremental investment in fixed assets and working capital as historically. Given the uncertainties of the potential income from the new agreement with Amazon announced in December, we are switching to using a reverse DCF-based valuation, in order to determine the incremental revenue and profit the current share price is discounting from the agreement with Amazon, and look at the sensitivities.

Before we get into those sensitivities, we should step back to our last published valuation of £120 per share in October 2024. At that stage, we used a weighted average cost of capital (WACC) of 8.7%, which included a risk-free rate of 3.95%, a beta of 1.0 and UK equity risk premium of 4.8% (source: Damodaran). Since our last report, the UK 10-year bond yield has increased to 4.7% and the UK equity risk premium has increased to 5.1% (source: Damodaran). Simply updating these numbers would lead to a large increase in our estimated WACC to c 10% and a reduction in our prior valuation before any updates following the results. Given the increase in bond yield has happened quickly, for the purpose of our analysis below, we use a WACC of 9.5%, towards the middle of the old and new estimates. GAW’s estimated WACC is ‘penalised’ by its low gross debt position, only its IFRS 16 liabilities of c £46m at the end of H125, which are small in the context of its equity market value of over £4bn.

GAW has entered the agreement with Amazon to develop content and to earn associated merchandising income for two key reasons: 1) to increase global awareness of its core business and generate incremental revenue; and 2) to generate incremental licensing income from the viewership of its content. The first of these is ‘easier’ to perform sensitivity analysis on as we can assume a percentage increase in the core business from the greater exposure provided. The second is more complicated to estimate as the terms of the agreement with Amazon are confidential and revenue will depend on the amount and frequency of content produced, which are currently unknown. As a result, we include no incremental revenue from the licensing income in our sensitivity analysis.

Our reverse DCF model, using the estimated WACC of 9.5%, suggests the current share price is discounting 30% incremental core revenue by FY31, which builds gradually from FY29, if we assume the first content is available for broadcast in FY28. Flexing the assumption for incremental core revenue down to 10% by FY31 would provide a current valuation of c £126 per share and down to 20% by FY31 would give c £133 per share.

Prospective valuation in a historical content

In the charts below we show how GAW’s prospective EV/sales and P/E multiples for FY25 and FY26 compare with its historical multiples. For each historical year, we show the high, average (number quoted) and low multiples using the market capitalisations and share prices in those years. In the EV/sales charts, we do not include IFRS 16 liabilities (adopted from FY20) in order to get a clearer long-term perspective of GAW’s valuation.

GAW’s prospective EV/sales multiples for FY25 and FY26 of 8.0x and 7.9x are above the average multiple of 7.0x from FY20–24. The prospective P/E multiples of 28.4x and 29.3x are also at a premium to the FY20–24 average multiple of 23.3x. The re-rating since FY17 reflects the company’s high rates of growth and profitability.