Your group is a team of investment analysts for Bresil Investments. Your role is to provide investment advice to high wealth individuals. Stephen has been a client of your bank for many years and has approached your manager for investment advice. Stephen has a large portfolio of shares and has recently inherited a large sum of money which he also wishes to invest in shares. Stephen has a broad portfolio of shares but he does not have very much exposure to the games retailing sector. One of his friends has recommended the following two companies Games Workshop PLC and Hornby PLC. His file has been passed to you by your manager and he has asked you to prepare report for him. You have carried out some preliminary and obtained summary financial, share prices and dividends of the organizations for the last two accounting periods.
In this course work, we have been asked to assume that we are a group of investment analysts for Bresil Investments and provide investment advisory service for Stephen Curry, a client who has a large portfolio of shares and is wishing to invest in retailing sector. Since he has got not much experience in this sector, he is seeking our help. The companies, Stephen has opted for making investment are Games Workshop PLC and Hornby PLC.
For this purpose, we have carried out a financial analysis of both the companies, after careful scrutinization of their income statement and balance sheet for the years 2008, 2009, 2010. We have compared each ratios against suitable benchmarks. The three bases taken for comparison where Time, Industry averages and Expectations which can b referred to as TIE benchmarking.
Games Workshop is one of the most successful tabletop fantasy and futuristic battle-games company in the world. Games Workshop Group PLC has been in business for about 30 years. Games Workshop deals with designing, manufacturing, distributing and marketing of a hobby based upon collecting, modelling, painting and tabletop gaming with model soldiers (the “Hobby”). The business of Games Workshop is about helping armies in the field of battle. The main brands of them are Warhammer and dark future Warhammer 40,000 game system. The company’s headquarter is situated in Nottingham, in the UK. It has got direct sales operations in the UK, the US, Spain, Italy, Canada, Japan, France, Germany and Australia.The majority of the sales and profits of the Group is being contributed by the Games Workshop. It was quoted in the London Stock Exchange and listed in the year 1994. Along with this, Games Workshop PLC has got other companies like BL publishing which is basically publisher of novels, background books etc.
Hornby is the UK’s one of the leading model railway manufacturer brand and it is a household . The founder of this company was Frank Hornby who applied for a patent in 1901 and after getting the patent, he started the production under the name ‘Mechanics Made Easy’ which in 1907, led to the establishment of Meccano Ltd. The company had good time in their journey later on. They started with the production of classic toys to toy trains in 1920 and electric train in 1925. Later on, they introduced lot of innovative toy product items down their way. The company, which is at present known as Hornby Hobbies Ltd, became an independent company and it was floated on the Unlisted Securities Market, on 29 OctoberA 1986. Now the company is simply called as “Hornby” and has become successful in establishing a firm reputation as a benchmark for the industries as far as quality is concerned which became possible for them, through the quality service they offer to their wide portfolio customers. Even now, Hornby is maintaining a firm position in the market , after having more than 50 years experience in this sector and is standing out as Britain’s leading railway manufacturers..
ROCE of Hornby decreased drastically from 29.47% to 17.67% to 12.65% where as that of Games Workshop increased slightly from 5.48% to 7.11% to 12.68%. This fall in ROCE for Hornby can be attributed to the rise in borrowings during the three years. This fall can also be accounted for the rise in share capital and reserves. This fall can also be linked to the decrease in the operating profit by 63.96% from 2008 to 2010. The profit after tax for Hornby has increased. Both the companies have shown an increase in revenue.
The net profit margin figure of Hornby has fallen from 16.85% to 11.21% to 9.27%, where as that of Games Workshop has risen from 2.31% to 7.11% to 12.68%. Games Workshop is maintaining a higher net profit margin than Hornby. Since the Roce of Games Workshop has been increased and its net profit margin has also risen, asset turnover ratio remains almost constant from 2.37 in 2008 to 2.21 in 2009. This shows the relation between ROCE, NP margin and Asset Turnover ratios.
In the last three years, the stock turnover period of Hornby has decreased from 165 days to 163 days to 137 days, where as that of Games Workshop has increased from 112 to 109 to 121 days. When comparing both the companies, Games Workshop has a lesser stock turnover period. This means that the movement of stock is faster than in Hornby. This indicates that Games Workshop is maintaining its stock more efficiently than Hornby.
There is a fall in the debtor collection period for both the companies in the last three years. It decreased from 70 to 78 to 75 days for Hornby and 33 days in 2008 to 29 days, which remained constant both in 2009 and 2010 for Games Workshop. Hornby can actually reduce the debtor collection period much further. Comparing both the companies, Games Workshop has higher efficiency.
For Hornby the current ratio is 1.87 in 2008 and 1.48 in 2009 and 2.11 in 2010. For Tesco the current ratio is 1.40 in 2008 and 1.74 in 2009 and 2.04 in 2010. Both the companies have shown improvement in the current ratio. Hornby is in a good position to clear its short term liabilities than Games Workshop. The standard current ratio is considered to be 2:1, since it is a bit higher, Hornby is not efficiently using its current assets.
Quick ratio for Hornby increased from 0.93 in 2008 to 0.72 in 2009 to 1.38 in 2010 . The ratio for Games Workshop increased from 0.90 in 2008 to 1.15 in 2009 to 1.49 in 2010. As a result the quick ratio of the company increased very well and On comparing both the figures, Games Workshop has higher liquid ratio and so, is in a better financial position to cover its short term liabilities.
The gearing ratio of Hornby has increased largely from 0.13% to 18.40% to 22.22% while that of Games Workshop decreased drastically from 32.21% to 22.98% to 0%. Games Workshop has a much lesser gearing ratio, when compared to Hornby. This means that Games Workshop has not taken much debt, whereas Hornby has to decrease its gearing ratio or else it will have to pay a high interest.
The interest cover ratio for Hornby has decreased from 25.10 in 2008 to 8.57 in 2009 to 7.42 in 2010, while that of Games Workshop has increased from 1.52 in 2008 to 7.1o in 2009 to 50.94 in 2010. The low interest cover ratio of Hornby indicates the large amount of borrowings it has made to finance the business.
Return on Shareholders Funds (ROSF) for Hornby decreased from 19% in 2008 to 10% in 2010. It increased from 3.59% in 2008 to 32.33% in 2010.
Dividend Payout Ratio for Hornby has increased from 52.5% in 2008 to 24.1% in 2009 and then shot up to 51% in 2010, and increased from 0% in 2009 to 51.65% in 2010 for Games Workshop . This indicates that the proportion of earnings Games Workshop pays out to its shareholders as dividends is more than what Hornby pays to its shareholders.
Dividend Cover ratio shows how much of profits are generated to cover the dividends. Dividend Cover for Hornby has increased from 1.9 in 2008 to 4.15 in 2009, and then decreased to 1.96 in 2010. The ratio for Games Workshop increased from 0 to 1.93 in 2010. This means for the year 2010 the profit generated by Hornby can cover its dividends by 1.96 times and profits earned by Games Workshop can cover its dividends by 1.93 times. Hornby is having more dividend cover than Games Workshop.
Dividend Yield of Hornby decreased from 4.49 % in 2008 to 3.997% in 2009 and 2010, where as it increased from 0% to 7.2% in 2010. Games Workshop has a higher dividend yield than Hornby. While looking at the scenario from an investor’s point of view, he would prefer to invest in Games Workshop. .
Price Earnings (P/E) ratio has decreased from 22.23 in 2008 to 6.07 in 2009, and later on rised to 12.85 in 2010 for Hornby. It has decreased from 72.5 in 2008 to 11.88 in 2009 to 7.14 in 2010 for Tesco. Price earnings ratio is directly proportional to the expectation of the investors concerning future growth. Hornby has higher P/E ratio than Games Workshop for the year 2010.
Hasbro, Inc is a company which performs in the same business as Hornby and Games Workshop. We can analyze the performance of Hornby and Games Workshop by comparing with the competitor i.e. Hasbro.
The ROCE of Hasbro was 23.53% in 2008 and 21.58% in 2009, where as for Hornby, the ratio was 29.47% in 2008 and 17.81% in 2009. Form this we can understand that there is a decreasing trend in ROCE for Hornby. So the profit will decrease in the coming years. The current ratio of Hasbro increased from 2.142% in 2008 to 2.5% in 2009, whereas that of Hornby decreased from 1.87% to 1.48% in 2009. In the year 2010, the current ratio for Hornby rose to 2.11%. so the financial position of Hornby to meet current liabilities is increasing. The gearing ratio of Hasbro increased from 0.337% in 2008 to 0.415% in 2009, whereas that of Hornby increased from 0.13% to 18.40% in 2009. So when we consider Hornby, gearing ratio is increasing, which will be a loss for the company.
The ROCE of Games Workshop increased from 5.48% in 2008 to 17.11% in 2009. On comparing ROCE of Games Workshop with Hasbro, there is an increasing trend, and so the profit will increase. The current ratio of Games Workshop increased from 1.40% to 1.74% in 2009. This ratio on comparing with that of Hasbro, indicates that the financial position of Games Workshop is increasing. The gearing ratio of Games Workshop decreased from 32.21% to 22.98% in 2009. The ratio further decreased to 0% in 2010. This will not be a loss for the company.
In the present technology driven world, you would hardly find people who are not familiar with the companies like Games Workshop PLC, Hornby PLC, Hasbro etc. Hobby enthusiasts who go crazy for technology, music, model toys, games etc are giving sheer push and great support to Hornby and Games Workshop. These industries have successfully made a mark on their respective wider industry. But they had to face many competitions within the competitors in the same field like Hasbro, Wizards of Coast etc . When the competition started going up, it automatically led to the diversification of the product lines like consumer products, mail orders, non-store retail, catalog, television sales etc..
The demand of games and toy industry ll shoot up in the near future due to the increase in demand for entertainment. All kinds of toys has been a demand among children of age grouped 12 and below. But the main threat for the toy industry is the hiking competition from other source of entertainment like internet, television etc. There has been a drastic difference of demand in the electronic gaming products. Gaming industry is one which always welcomes innovation. In the past 10 years, lot of innovations has happened in this sector and it has led to the introduction of lot of product items into the market. There is a wide range of market for this sector and the most interesting part is that, the demand for electronic gaming products has always shown a rise and it has now become an unavoidable part of entertainment for the customers of almost age group.
If we take Games Workshop PLC into consideration, it has made an appreciable contribution to the whole British Gaming Industry. Games workshop has been planning lot of new projects and proposals and as a latest update, Games Industry and Fantasy Flight games have entered an agreement. As per the agreement, the Fantasy Flight becomes the exclusive publisher of card games, board games and role playing games based on Games Workshop’s family of renowned intellectual properties. The company has got an expectation of achieving a 20% growth in profit behind the making of this contract. The company saw its revenues rise 13.5pc to £61.2m for the six months to November 30, as the company swung into a £3.1m pre-tax profit from a £300,000 the year before and is expecting a higher rate in the coming years.
On the other hand, Hornby Plc, has announced that it has entered into a contract with Humbrol Limited in Administration for acquiring a few assets. The contract has been made worth 6.5 million pounds. The company is thereby forecasting a significant growth in the near future. They have got plans to launch a series of new products with better performance. The company is expected to have an upward growth after having received the rights for the production for the Olympics in the year 2012. Hornby has also got plans to re-construct their present business, after relocating their distribution, sales and marketing operations centre to its own site in kent. They have also got plans to re-locate their manufacturing and assembling processes to third parties which will help the company to focus on the other aspect of sales whereby they could shoot up their sales level.
The success of all companies is in identifying the most appropriate market, fixing their target, identifying the market trend and developing products which could satisfy the present customer wants. Games Workshop and Hornby has the ability to provide a wide selection of product items and have scale advantages in purchasing, producing, distributing,marketing and selling of products. Both the games and hornby are expecting a bright and successful future laid before them.
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