A share price pullback at online musical instruments retailer Gear4music (G4M:AIM) presents a sweet-sounding buying opportunity at 672p.

Geared into the channel shift online, Gear4music is emerging from a heavy investment phase. Fiscal year 2019 should see profit growth coming through strongly and its global market share remains modest, implying plenty of profitable growth to come in the years ahead.

COME ON FEEL THE NOISE

Gear4music is a fast growing business benefiting from the migration of high street sales online combined with its successful customer-first strategy. It sells its own-brand wares as well as premium
third-party brands such as Fender, Roland and Yamaha.

Operating from a head office in York and distribution centres and showrooms in York, Sweden and Germany, the largest UK-based online musical instruments retailer has identified a niche which appears less susceptible to the threat from Amazon.

The US tech titan seems more focused on accessories and lacks the showrooms that physically showcase Gear4music’s products and build local brand loyalty and repeat business.

Fast-growing Gear4music still only speaks for around 6% of the UK market and 1% of the European market, suggesting it is still early days in the group’s global growth story. Expansion into Europe is powering strong international growth, and there’s long-term potential in the US and other global markets.

SOLID REVENUE GROWTH

Results for the year ended 28 February revealed sales up 43% to £80.1m, although EBITDA was broadly flat at £3.5m, reflecting investments in its European operation and customer proposition to support growth and drive market share.

‘We’ve invested ahead of the growth curve,’ CEO Andrew Wass informed Shares on results day.

Peel Hunt is a buyer with a £10 target price, implying almost 50% potential upside, arguing Gear4music is simply becoming a bigger and more effective retailer, whose relationships with suppliers are ‘clearly improving’.

Furthermore, own-label product is growing as rapidly as branded product sales, demonstrating the appeal of the Gear4music brand with less affluent shoppers.

For the year to February 2019, Peel Hunt forecasts £105.3m revenue which should translate into 87% growth in adjusted pre-tax profit to £2.8m. The following year is expected to show £132.9m revenue and £4.6m pre-tax profit.

Based on the current year’s 11.2p earnings per share estimate, Gear4music trades on a premium 60-times rating. Yet with EPS forecast to grow by 67%, the PEG ratio of 0.9 looks palatable and the PE ratio falls to 37-times based on the following year’s forecast 61% growth in EPS to 18p. (JC)

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