Stock Pitch - Gear4Music (LON:G4M)

4th Jun '21 by Jack Brumby

20 comments 5177 reads

Gear4music Holdings (LON:G4M) is a leading UK based online retailer of musical instruments and equipment that is expanding quickly across Europe.

Launched in 2003 by current CEO and c30% shareholder Andrew Wass, revenue has grown every year since inception and has increased from £12m in FY13 to £157.5m in FY21. The Europe market for musical instruments is estimated to be around £5bn, so that suggests room for further growth.

There is competition with the likes of Thomann, but G4M has been built from the ground up as a website-based e-commerce platform and has invested in its own software and logistics capabilities.

Despite this evident specialisation and the recent rerating, G4M trades at a notable discount to other online retailers such as BooHoo and Asos. On this basis, the shares were pitched to the Stockopedia Investment Club on the 18th of May 2021 at 890p per share.

There’s no doubt business has been helped by Covid lockdowns, so it’s possible that the recent outperformance might revert to some degree.

That said, brokers expect net profit to fall by more than 50% in the year ahead. Is this caution warranted, or are G4M’s growth prospects being unduly discounted?

Summary

Bull points: multi-year revenue growth and market share gains across multiple territories (sales growth every year since 2003); improving profitability; trades on P/S discount to other e-commerce stocks; UK and Europe operations; proprietary e-commerce end-to-end platform; founder-owner CEO; own-brand product range built up over 17yrs; efficient logistics system

Bear points: Covid trade boost might subside; profitability has been an issue in the past; looks expensive on TTM basis; easy rerate has already happened

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About the Stock:

Gear4music is a Consumer Cyclicals company in the Specialty Retailers industry group.

It trades on the LSE AIM market, with a market cap of £183.3m. Liquidity is a slight issue - although you can buy around £6,500 worth of stock on the market, the spread is 343bps.

The group is classified as a Speculative Small Cap Neutral, although it is on the verge of High Flyer status, with a Q Rank of 93, a V Rank of 45, and an M Rank of 76.

The share price has plateaued recently after a dramatic rerating, but the relative strength measures remain positive. Meanwhile the 5Y revenue CAGR is 37.8% and the operating profit CAGR…

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Bluesky Ventura

4th Jun '21

Nice write up Jack,

I do approve of buying Gear4music Holdings (LON:G4M) and selling N Brown (LON:BWNG) .

Good luck with the investment

BSV

Norfolk'n'Good

Another fantastic in depth write up - thanks Jack!

I hold Gear4music Holdings (LON:G4M) - I just can't see anything in N Brown (LON:BWNG) especially as the latter seems to make more money from extending expensive credit than actually selling clothes etc.

DWit199

StockRank history suggests you have made the right choice.

Laughton

Many thanks Jack for a very comprehensive write-up.

A long term fairly high conviction holding for me - got in too early so it's been frustrating but now comfortably in the black.

I particularly like the Digital Products Download System (instant gratification) and the Second Hand Products Platform (don't car dealers make better profits on second hand cars than they do on new ones?)

My confidence is boosted by knowing that the Club decided to hop on board (even if not unanimously).

andrea34

Overall this is, as ever, an interesting write-up; I hold a small amount of £G4M myself.

However, the one disappointing element is what seems to me a ludicrous comparison to other companies. Everyone knows that the Deliveroo (LON:ROO) IPO was a total flop and the company is heavily loss making. I find it bizarre why you haven't compared £G4M to Focusrite (LON:TUNE) which, to me, seems to be the closest of companies in terms of product offering.

How does one find the total portfolio of pitched companies, please?

andywillz94

Great write up Jack.

Funnily enough, this was the same trade off i made in April- sold BWNG in favour of G4M.

fingers crossed it was the right choice!

Link to all the posts.

CabinPressure

Great write up and analysis.

Thanks,

Key question is whether CEO Andrew Wass can successfully sneak into new products and / or new geographical regions, like Jeff Bezos CEO Amazon has done.

If you have built the best sales system, then in theory you can start selling a second product type, in a similarly successful manner.

The main problem is recruiting the right staff on a timely basis, because there is a huge amount of coding to be done.

I do not hold G4M, but am inclined to consider it after reading this review.

Investor1942

I first bought Gear4music Holdings (LON:G4M) in2016 and topped up in January 2019 whence they have virutally trebled so am happy to hold for the ride. I have also bought instruments off them on two occasions and have been very happy with the service even though one was returned as the present was not appreciated!

Neil W

can you please confirm the 16 stocks u now hold as wasn't clear. Thanks

doctor dave

5th Jun '21

It’s an excellent write-up but I think you have made the wrong call. You are buying Gear 4 Music at the top (people have been sitting at home nurdling on the guitar) and are underrating N Brown which you are now selling near the bottom even though it caters for the unfashionable majority.

Tortoise investor

i like Gear4music Holdings (LON:G4M) but have sold out as I think there will be a better buying opportunity soon. H1 for FY21, which benefited from lockdown, will be a strong comparator for H1 FY22 and brokers have indicated margins will likely fall back especially as there is some indication people bought higher margin Gear4music Holdings (LON:G4M) own brand products eg for children during lockdown. Will be interesting to see how next few months go.

Tombholliday

Excellent write up have been adding compared to ASOS and Boohoo it is a higher quality business - there really are not that many returns on a piano or a bugle compared to a crop top bought on a whim. Well regarded locally less well known in the south

Funderstruck

Select 'TODAY' --->Discuss ---> The Inv Club.

Bouden54

Agree it is a higher quality business than either of those two - you don't need to worry about musical instruments going out of fashion or concerns over the supply chain. As G4M grow and take market share there won't be many companies that will have the scale to compete - again this will never be the case in the fashion sector as there are too many players.

Jack Brumby

7th Jun '21

Always happy to hear a counter-argument, djrhs.

We shall find out soon enough regarding any kind of post-Covid mean reversion.

A substantial part of the pitch is based on medium to longer term prospects though, in which case £G4M is proving itself as an established leader in its niche whereas N Brown (LON:BWNG) is following in the footsteps of market leaders.

Both have their pros and cons and are different types of opportunities. Hopefully both do well!

There could be some share price volatility in the short term as shops open back up, but broker forecasts are already factoring in quite a dip in profits.

If a sharp drop does occur then the Club will have to decide whether to hold, add more, or sell the position. To some degree, this will depend on how the StockRank fares as well as we have a rule to eject shares once they fall below a certain Rank.

That aside, if the underlying prospects remain unchanged then it could be an opportunity to add on a longer term view.

IsaT

16th Jun '21

Yes, could someone please spell out where one can find the current portfolio of stocks of the investment club? I can't find this.

Rusty2

I don't think there a portfolio as such but this may help: https://www.stockopedia.com/columns/the-investment-club-63/

Pity they don't have the fantasy funds on the new site, as it would be a good way of showing everyone.

Thank you herbie47. I had seen this link/page, but you have to go through each sub-link write up to see if the individual proposed stock made the grade - and then double-check to see if it's still held. So I agree it's a shame there isn't a clearer way of representing the current portfolio. Jack Brumby? Edward Croft?

Stock Pitch - Gear4Music (LON:G4M)

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Jack Brumby

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