Gear4music Holdings — Jingle bells

Gear4music Holdings — Jingle bells

Gear4music (G4M) has fulfilled the strong expectations of its four-month Christmas trading period. Revenue growth of 42% is consistent with H1 and is in line with expectations, both in the UK and faster growing international markets. This means that the online model continues to take share, achieving growth far ahead of consumer fundamentals and building on its market-leading position. We retain our forecast and reiterate our valuation stance, which sees upside based on the rate of development of international markets.

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Gear4music Holdings

Jingle bells

January trading statement

Retail

5 January 2018

Price

772p

Market cap

£162m

Net debt (£m) at August 2017

3.7

Shares in issue

20.9m

Free float

64%

Code

G4M

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

9.9

(8.1)

53.6

Rel (local)

4.9

(11.0)

41.6

52-week high/low

865p

500p

Business description

Gear4music is the largest dedicated, UK-based online retailer of musical instruments and music equipment. It sells branded instruments and equipment, alongside its own brand products, to customers ranging from beginners to professionals, in the UK and into Europe and the rest of the world.

Next events

Pre-close

Early March 2018

Preliminary results

May 2018

Analysts

Paul Hickman

+44 (0)20 3681 2501

Neil Shah

+44 (0)20 3077 5715

Gear4music Holdings is a research client of Edison Investment Research Limited

Gear4music (G4M) has fulfilled the strong expectations of its four-month Christmas trading period. Revenue growth of 42% is consistent with H1 and is in line with expectations, both in the UK and faster growing international markets. This means that the online model continues to take share, achieving growth far ahead of consumer fundamentals and building on its market-leading position. We retain our forecast and reiterate our valuation stance, which sees upside based on the rate of development of international markets.

Year
end

Revenue (£m)

EBITDA
(£m)

PBT*
(£m)

EPS*
(p)

P/E
(x)

EV/EBITDA
(x)

02/16

35.5

1.7

0.6

3.1

246.9

93.9

02/17

56.1

3.7

2.7

11.6

66.4

45.1

02/18e

81.4

4.1

2.4

10.0

77.3

40.3

02/19e

102.1

5.2

3.3

13.3

57.9

32.0

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Pre-Christmas trading on expectation

G4M reports 42% y-o-y growth in total sales for the four months from September to December, its important pre-Christmas sales period. That is reassuringly close to the 44% growth in the first half, with trading in line with expectations. Growth for each of the geographies was also close to H1 levels. The UK (25% vs 30%) continued to provide substantial sales growth, and international sales (69% vs 70%) are powering ahead based on increased capacity and localised delivery options provided by the Swedish and German hubs. Active customer numbers were 38% up at 450,000, and are already 15% higher than at the half year. Website conversion, which is characteristically strong in this period, was up from 3.0% a year ago to 3.3%.

Revenue returns to underlying strong growth

G4M comments that two-year revenue growth of 120% is ahead of the same stage last year at 114%. This looks through the upward blip in September to December 2016 (+55%), which was supported by investment in stock at pre-referendum rates, as well as the upsurge in own-brand products following investment in the wake of the IPO. A year before (September to December 2015) growth had been 38%. The inference is that growth is returning to underlying strong rates.

Forecast unchanged

We commented at the half year that we expected second-half revenue to grow by similar rates to the first. That is the case, and we are not changing our forecast.

Valuation: Pricing market share gains

We reiterate our valuation stance. Short-term P/E and EV/EBITDA multiples remain top of the range of pure-play online retailers. G4M’s current share price implies around six years to reach market share of 6% in mainland Europe. Achieving that one year earlier would imply 1,110p. Alternatively, overlaying a 1% share of the US market developed over the next 10 years would be equivalent to a share price of 967p. The two combined would be equivalent to a share price of 1,274p.

Exhibit 1: Financial summary

£'000

2016

2017

2018e

2019e

2020e

Year end: February

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

35,489

56,128

81,410

102,116

127,347

Cost of Sales

(26,303)

(40,983)

(60,399)

(74,931)

(93,328)

Gross Profit

9,186

15,145

21,011

27,186

34,019

EBITDA

 

 

1,688

3,656

4,092

5,150

6,664

Operating profit (before amort. and except).

 

903

2,655

2,648

3,589

4,746

Amortisation of acquired intangibles

0

0

0

0

0

Exceptionals

(606)

0

0

0

0

Share-based payments

(8)

(39)

(64)

(65)

(81)

Reported operating profit

289

2,616

2,584

3,525

4,664

Net Interest

(283)

20

(288)

(264)

(264)

Joint ventures & associates (post tax)

0

0

0

0

0

Exceptionals

0

0

0

0

0

Profit Before Tax (norm)

 

 

620

2,675

2,360

3,325

4,482

Profit Before Tax (reported)

 

 

6

2,636

2,296

3,261

4,400

Reported tax

(49)

(322)

(283)

(532)

(717)

Profit After Tax (norm)

571

2,353

2,077

2,793

3,765

Profit After Tax (reported)

(43)

2,314

2,012

2,729

3,683

Minority interests

0

0

0

0

0

Discontinued operations

0

0

0

0

0

Net income (normalised)

571

2,353

2,077

2,793

3,765

Net income (reported)

(43)

2,314

2,012

2,729

3,683

Basic average number of shares outstanding (m)

18.2

20.2

20.7

20.9

20.9

EPS - basic normalised (p)

 

 

3.1

11.7

10.0

13.4

18.0

EPS - normalised (p)

 

 

3.1

11.6

10.0

13.3

18.0

EPS - basic reported (p)

 

 

(0.2)

11.5

9.7

13.1

17.7

Dividend per share (p)

0.00

0.00

0.00

0.00

0.00

Revenue growth (%)

46.4

58.2

45.0

25.4

24.7

Gross Margin (%)

25.9

27.0

25.8

26.6

26.7

EBITDA Margin (%)

4.8

6.5

5.0

5.0

5.2

Normalised Operating Margin

2.5

4.7

3.3

3.5

3.7

BALANCE SHEET

Fixed Assets

 

 

4,477

7,102

13,718

14,730

15,811

Intangible Assets

3,238

5,537

6,094

6,612

7,083

Tangible Assets

1,239

1,565

7,623

8,119

8,728

Investments & other

0

0

0

0

0

Current Assets

 

 

11,194

16,035

21,225

24,340

28,712

Stocks

6,906

11,686

15,426

19,008

23,200

Debtors

740

1,348

1,955

2,452

3,058

Cash & cash equivalents

3,548

3,001

3,844

2,880

2,454

Other

0

0

0

0

0

Current Liabilities

 

 

(6,022)

(10,000)

(10,925)

(12,970)

(15,495)

Creditors

(5,188)

(7,379)

(7,957)

(9,901)

(12,329)

Tax and social security

0

0

0

0

3

Short term borrowings

(834)

(2,621)

(2,969)

(3,069)

(3,169)

Other

0

0

0

0

0

Long Term Liabilities

 

 

(290)

(1,415)

(5,988)

(5,343)

(4,526)

Long term borrowings

(127)

(24)

(4,728)

(4,491)

(4,141)

Other long term liabilities

(163)

(1,391)

(1,260)

(851)

(385)

Net Assets

 

 

9,359

11,722

18,029

20,758

24,502

Minority interests

0

0

0

0

3

Shareholders' equity

 

 

9,359

11,722

18,029

20,758

24,505

CASH FLOW

Op Cash Flow before WC and tax

1,688

3,656

4,092

5,150

6,664

Working capital

(1,416)

(3,618)

(3,769)

(2,134)

(2,370)

Exceptional & other

(607)

28

(64)

(65)

(81)

Tax

0

(104)

(283)

(532)

(717)

Net operating cash flow

 

 

(335)

(38)

(25)

2,419

3,496

Capex

(1,509)

(2,195)

(7,680)

(2,573)

(2,999)

Acquisition: deferred payments

0

0

(409)

(409)

(409)

Net interest

(130)

(47)

(288)

(264)

(264)

Equity financing

9,535

0

4,193

0

0

Dividends

0

0

0

0

0

Other

0

0

0

0

0

Net Cash Flow

7,561

(2,280)

(4,208)

(827)

(176)

Opening net debt/(cash)

 

 

4,974

(2,587)

(356)

3,852

4,680

FX

0

0

0

0

0

Other non-cash movements

0

49

0

0

0

Closing net debt/(cash)

 

 

(2,587)

(356)

3,852

4,680

4,856

Source: Company accounts, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Gear4music Holdings and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Gear4music Holdings and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Windar Photonics — Engagement with OEMs intensifying

Following the announcement of a transformational contract on 4th December, Windar Photonics issued two announcements later in the month regarding orders related to wind turbine OEMS. Although neither order was of the scale of the earlier transformational contract which was primarily for retrofitting turbines already in the field, they demonstrate the interest OEMs are showing in the technology, which will potentially lead to strong growth in future. We will update our estimates following the pending pre-close trading update.

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