Fantasy miniatures and table-top war games retailer Games Workshop (GAW) is benefiting from a step-change in royalty income and we believe further exploitation of its intellectual property can take the business to the next level.

Broker Peel Hunt forecasts royalty income of £10m in the six months to 1 December 2019, nearly double the level from the same period last year.

The company is now demonstrating its potential to commercialise the intellectual property which resides in the Warhammer brand through console and PC games as well as animation and TV content.

Games Workshop says the Warhammer-community.com website achieved over 114m page  views from around 6m users in the 12 months to 2 June, up from 70m page views and 5m users in the previous year.

Growing royalty income is an important development for Games Workshop because it demonstrates the ‘hidden’ value of its brand. Not only that, royalties are almost pure profit and relatively stable and should therefore attract a higher valuation multiple over time.

This was illustrated in a recent trading update where the 12% rise in year-over-year revenues to £140m should have converted nearly all into profit.

Games Workshop has a simple but powerful business model centred on the quality manufacturing of miniatures and games. The physical stores are a place where you’ll find enthusiasts who aim to interact with everyone coming through the door.

This interaction is designed to create a feeling of being part of a community, and strengthens loyalty while increasing the likelihood of repeat sales.

The company only manufactures fantasy figures, and therefore has potentially unlimited scope for innovation. Popular fantasy series like Game of Thrones help to raise interest in the genre, but the company controls its own fortunes as the success of Warhammer demonstrates.

The scope for growth is still significant and comes from well-established channels of Games Workshop stores, which account for 34% of revenue, third-party retailers which represent 47% as well as online stores.

This is an international business too with more stores in North America and Mainland Europe than the UK.

The shares aren’t cheap, trading on 24.7 times forecast earnings. Yet Games Workshop is a quality business with a proven track record and is well positioned for further growth.

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