Smaller companies: Games top fantasy league

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The Independent Online
Games Workshop is a remarkable story. It continues to attract new investors anxious to secure a slice of the action before everyone and his wife has climbed aboard the bandwagon, writes Richard Phillips.

The company, floated in October 1994 at 115p, now stand at an unearthly 645p.

Much like the games it supplies its eager following, the plot is fantastic. Games Workshop makes lead and plastic models of the bizarre characters used for complex fantasy games. Many of its customers are teenagers, but there is an adult audience as well.

Last week it posted the now-obligatory stellar performance in sales and profit growth. Turnover was up 30 per cent to pounds 58.37m; pre-tax profit jumped 27 per cent to pounds 11.12m. Clearly its margins are almost as unreal as its products, but the games are highly crafted and imaginative and very much in demand.

In the UK, it operates through a chain of 101 shops. It also now owns 14 stores in France, 10 in Australia, eight in Spain, five in both Canada and Germany, four in the US, and two in both Hong Kong and Ireland.

The US is a key market, accounting for 20 per cent of sales, a rise of 42 per cent from last year. US growth, said chief executive Tom Kirby, was helped by the decision to sell direct to independent retailers rather than by using distributors. Games Workshop has won sales in Europe by translating its games into other languages, and they will soon be available in Mandarin Chinese.

A number of points stand out about the business. First, it has no obvious competitors. Second, most of its markets remain under-exploited. Third, cash flow is exceptionally good. But a potential downside is that interest from its fans might wane. And the games compete in a wider market for hard-earned leisure spending - although fantasy games are popular, there are all sorts of broadly competing products, especially computer games. If the UK market is not yet saturated, coverage of its products must be reaching a significant proportion of the population by now.

Still, it seems reasonable to assume that the strong expansion of recent years can be maintained. The question is whether the shares offer much in the way of value. If profits were to grow at a similar rate next year to hit, say, pounds 13m, and earnings per share rose to 27p, the shares would trade at 22 times earnings.

On the basis of how far and how fast the company has come, that seems to offer fair value. There must always be a possibility that it will attract the interest of a larger group, possibly even one of the US leisure or toy empires. Buy.