7:59 cut – GAW, SOM

Games Workshop – FY trading statement

Right on schedule (it was Friday 8th June last year). Sales are inline with forecasts that were raised in September and April/May. £80m PBT would be 7% up on £74.6m last time.

This confirms that growth has slowed after the extraordinary growth for FY 2017 and 2018, but that earlier forecasts that profits reached an unsustainable high in FY 2018 were unfounded.

Today’s update will focus minds on the current valuation of the share which at 21.5x is quite rich. It did reach a larger valuation in September, but only on forecasts that were widely believed to be too low (and indeed the trading update was positive).

I sold half my holding at slightly higher levels and if the price holds up this morning will be selling my remaining position, partly motivated by a desire to focus my portfolio on fewer shares.

Somero – FY 2019 profits warning

Somero warn that principally due to adverse weather in the US, their largest market, they expect revenues to December 2019 of $87m, a significant miss against the current $98m forecast. They expect EBITDA of around $28m, vs a reported adjusted EBITDA of $30.8m last time (I believe these figures are comparable – the latter is adjusted for FX which was immaterial last year).

Importantly, they continue to see underlying growth in the US, with no signs of a slowing economy. They make no reference to any effects of tariffs such as increased raw material costs. The remainder of their markets are flat to mixed.

Today’s update reinforces how dependent they are on their home market and how attempts to diversify have met with limited success so far.

Outlook is very strong and so there seems every chance that the 2020 forecasts will be maintained, the main risk being the economy. It is quite early to forecast 2019 and there must be a fair chance they will beat updated projections.

Earnings growth had already slowed and was forecast to progressively slow further in both 2019 and 2020, but could easily have been boosted by buying back shares if they had so wished. I’m very comfortable to take the large dividends and make my own investment decisions, although note that some withholding tax is unavoidable unless held in a SIPP.

This company has never looked expensive and it will be a core part of my portfolio for the foreseeable future. Nonetheless I had been reducing my position that I built up at the market lows around the turn of the year on concerns over its cyclical nature and dependence on the US economy.

I will be re-adding on weakness.

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