The Week Ahead (13-17 January): GAW, FDEV

Good afternoon and welcome back to the Week Ahead.

After a quiet start to the week, company newsflow has stepped up a gear in the last couple of days. We’ve had a good scattering of trading updates from retailers and another surge of takeovers (three to talk about this morning).

On Tuesday Keelan wrote about why the outlook for takeovers is worth taking note of. And Mark has compiled a very comprehensive guide for private investors who hold companies which receive a takeover bid. You can read that here.

The week in review

Outside of companies' news, the biggest story of the week has been the movement in bond markets.

Earlier in the week, the UK government sold new 30year bonds at a 5.2% interest rate, which sent the yield on 30year gilts to their highest level since 1998. The yield on 10year bonds has also risen to highs not seen since 2008. On Thursday the yield hit 4.93% while the pound dropped to its lowest level against the dollar for more than a year.

The sell-off in the price of bonds (which is what sends yields higher) reflects concerns about the fiscal prospects in the UK. Investors are worried about a rising threat of stagflation (when inflation is high, but the economy is shrinking) in combination with the government’s ongoing heavy borrowing needs.

And this is all before the proposed national insurance changes kick in in April, which could stimulate further price inflation. This week, Next clearly laid out the impact that NI hikes will have on the company’s cost base and said it was likely to push some of those higher costs onto customers. Greggs (which employs over 30,000 staff) also said it would ‘mitigate the NI costs’, while trying to maintain its decent value offering.

The UK is not alone in suffering falling bond prices. In the US, the yield on 10year bonds rose to 4.7% this week. While in Europe, French, German and Italian bonds yields all crept higher.

The equity markets have been mixed, although the FTSE All Share looks like it’s on track to end the week moderately higher:

In the US, the S&P 500 was dragged down on Tuesday by a fall in the share price of Nvidia (which makes up 7% of the index) after the chief executive’s keynote speech at the Consumer Electronics Show. We talked about the dominance of the Magnificent 7, which now make up 40% of the total S&P 500 in our webinar on Wednesday. Those who missed it can catch up here.

The Week Ahead: 13-17 January

Onto next week, starting with the economic calendar.

Economic Calendar

Companies Reporting

It’s still quite quiet for pre-announced earnings releases or even trading statements, but we expect more newsflow during the week.

A tale of two gamers: GAW and FDEV

Not that long ago, Games Workshop (LON:GAW) and Frontier Developments (LON:FDEV) could be held up as peers. They both sell products to similar end markets. Games Workshop makes fantasy worlds full of miniature figurines for a relatively niche division of the gaming community, Frontier Developments makes video games.

In 2021, both had enjoyed strong share price rises driven by rising demand for their products and supported by a robust financial position.

But as Games Workshop has continued the march upwards and recently entered the FTSE 100, with a market capitalisation of £4.4bn, Frontier Developments has collapsed. From highs of over 3300p, the share price is now just 189p.

Now I am not saying that the two companies followed the same operating model. While Games Workshop focused on its core IP, building on its loyal core audience and expanding the universes it creates, Frontier Developments has spent a lot of time building video games for other people. A reliance on inflows of IP from others meant profits were always lumpy. In years that the company was building the games, costs would be very high and profits relatively low, while profits would soar in the period immediately after a game launch.

In recent years that strategy has haunted Frontier Development, with 2024 being described by the chairman as “the most challenging in the company’s 30 year history.” In both of the last two financial years, the company has been loss-making at the operating level largely because of whopping depreciation costs and impairment charges made on underperforming games.

And so, in 2024 management made the decision to refocus on its core expertise in building so-called creative management simulation games (those in which the players build or operate a virtual world). As part of the strategic ‘reset’ the company sold the publishing rights to Roller Coaster Tycoon for £4.9m which helped bolster the cash-based operating performance in the second part of the year. Still it took heavy adjustments to report a tiny positive EBITDA number in the second half of the year.

In first half results due next week, it will be interesting to see whether the turnaround is delivering anything more meaningful.

Megan’s view:

Games Workshop is a truly fabulous company and despite its slightly toppy forward price to earnings ratio of 27x, I remain positive about the investment case. Next week we might get more detail on the company’s IP tie up with Amazon, which could see television series made out of the Warhammer worlds. The Amazon deal could be a boon for the IP section of the company, as well as fantastic marketing. GREEN.

As for Frontier Developments, this has been a real disappointment and because it’s such an asset light business (something which should lead to higher margins), there isn’t even much of a value argument to be made at current levels. I’ll delve into the results next week, but for now I am sticking with the principle: ‘don’t try to catch a falling knife’. RED