Investors’ Chronicle: Games Workshop, Quilter, Safestore

BUY: Games Workshop (GAW)

With a still demanding price to earnings ratio of 36, the shares do not seem as expensive as usual, writes Lauren Almeida.

The nerds have conquered again. Games Workshop’s operating profit grew by more than half to £92m in the six months ended in November, as the wargames maker proved once more that its fans are hooked on its fantasy lore. Or perhaps it is the fumes from the paint. Either way, hobbyists eagerly greeted the release of the latest version of Warhammer 40,000 in the period, which management said was its most successful launch to date. 

This unwavering passion for miniature “orks”, and other such fantastical creatures, is the company’s lifeblood. And management is harnessing its energy: the new range’s Indomitus box, for example, was designed to reward existing customers, and sold out extremely quickly. Fans spent more time with the brand online, as the “Warhammer-community” website grew to an enormous 4.7m users, and customer sessions and pageviews grew.

Focus on engagement evidently pays off. Sales have been so strong that the company said that its “out of stocks” are currently running higher than it would like. Sales to independent retailers grew by a third, with the net number of trade outlets increasing by around 200 accounts to surpass the 5,000 mark. But the biggest growth, unsurprisingly, was in online channels where revenues surged by 87 per cent. Management noted, however, that the user experience for its website still needs to be improved, with a greater focus on personalised content and ease of navigation. 

Its bricks and mortar stores did not perform so well, hurt by coronavirus restrictions — although the company noted that it was in the process of cancelling its access to the UK’s business rates retail discount scheme. It reiterated its commitment to physical shops, describing retail as “paramount” and the best place for the customer to start their journey with the hobby — which goes some way in explaining why the company opened two stores in new locations in the period. Still, if current sales trends continue for the rest of the year, management estimated that around 50 stores out of 529 would not break even. 

Overall, gross margin moved up an impressive 6 percentage points to 75 per cent, credited to increasing volumes. This was no doubt helped by its focus on manufacturing, with output up by almost a third: the Warhammer 40,000 launch alone broke records for factory production volumes, in what management described as a “step change” in unit sales.

Developing its manufacturing capacity scale remains a key focus for management, who are already overseeing the redesign of one of its factories in the UK and who have secured more adjacent land in Nottingham to open up “future options”. 

This push for greater scale is already bearing fruit: sales in North America performed particularly well, where revenues generated by third-party retailers grew by almost a third to £45m, accounting for two-fifths of the trade division’s total. 

Keen engagement, robust revenues and growing scale make for an attractive combination. It is hardly surprising then that Games Workshop was able to pay £1.3m to its staff in December, as well as a total £5m bonus to all of its employees. And shareholders have not missed out: management dished out £26m in dividends, and still finished the period with £96.5m worth of net cash (excluding lease liabilities), compared to £53m at the same point last year. 

Games Workshop is no doubt a high quality operation, with a winning focus on product, engagement and scale. This means that investors will likely struggle to find a bargain entry point. But the market hype that has followed the stock meant that shares slipped 9 per cent on the day of the results.

Hold: Quilter (QLT)

A long-delayed and complex IT platform migration, at a cost of more than £360m since the project started in 2014 is expected to complete in the coming weeks, writes Alex Newman.

In 2020, Quilter moved its 4,500-strong workforce to remote working almost overnight, announced a strategic review of its international arm, saw a newly acquired subsidiary become the subject of a Financial Conduct Authority (FCA) investigation, while managing to grow its client asset pile in a turbulent year for financial markets.

Despite the profound change and turbulent conditions, chief executive Paul Feeney strikes an optimistic tone. “Morale has been good, and if anything, productivity has improved,” he notes, outlining how his advisers have saved “a day a week” from online working, and now typically hold between two and three meetings a month with each client.

As with many wealth managers in the Covid-19 era, the FTSE 250 group reports having grown trust and engagement with its existing client base, but has struggled to win new investors amid lockdown measures and social-distancing rules. For Quilter, that task has arguably been complicated by the need to build its profile following its 2018 spin-out from Johannesburg-headquartered financial services giant Old Mutual.

One solution is to position the group as an ESG-focused financial advice-led asset manager, mirroring the efforts of the world’s largest wealth manager, UBS, which last year put sustainable investments at the centre of its private client offering.

“Covid brought three to five years of change forward in three to five months,” says Mr Feeney, reflecting on the shift in sentiment toward ethical investing. “I want us to be the responsible investment wealth manager, and our programmes are in place to make this happen.”

This bias is not new. A spokesperson for Quilter said the group’s sustainable approach to client service — which includes the £161m Quilter Cheviot Climate Assets Fund and tools that allow investors to screen for ethical investment — has “just celebrated its 10-year anniversary”. Quilter Investors,
the group’s multi-asset fund provider, also has plans to launch other ESG services in the coming year.

As the company tells it, this focus amounts to pushing on an open door, given a reported increasing interest in responsible investing across a client base whose average age is 64.

“I don’t think you can be agnostic; you have to take a position,” says Mr Feeney. “The trick for me is not so much the manufacturing of the investments, because we believe that ESG will simply become the weave of the investment world fabric; it will simply be the way to invest. Our job is to join up advice with the investment manufacturing process.”

Knowing what this brave new world means for the day-to-day operational concerns of a wealth manager is an altogether different question. But events have provided some room for rationalisation of the cost base.

A new City office, the lease of which was signed just prior to the pandemic’s onset, is now thought to be big enough for all London-based employees once lockdown restrictions are unwound. Flexible working is here to stay, adds Mr Feeney, who expects not to renew some of the leases on Quilter’s remaining 13-strong office network.

Answering the technology concerns has helped the group to perform well since its June 2018 initial public offering. Having recycled the £445m cash raised from the sale of the group’s closed life insurance and pensions book into a stock buyback programme, the shares’ total return has more than doubled those of St James’ Place since flotation.

That has also helped Quilter evade the scrutiny directed to its larger rival, which in October was accused by activist investor PrimeStone Capital of rewarding clients, partners and employees at the expense of shareholders over the past half-decade.

This shouldn’t imply that public life has been a bed of roses for Quilter, which was forced to book a £29m provision with its 2020 half-year results as redress for 266 British Steel workers who were wrongly advised to transfer out of their defined-benefit (DB) pensions by Lighthouse, an advisory group acquired by the wealth manager in 2019.

Mr Feeney acknowledges the problem that legacy advisory relationships — now the subject of an FCA probe — were missed in the due diligence process, but would have been “very difficult to find”. “We will put right any past issues just as if they were Quilter clients at the time,” says the chief executive, who this month assumed the chair of the FCA’s panel of independent practitioners.

The provision “should more than cover” redress to the affected parties. It’s another sign that Quilter can confidently address its issues whenever they appear.

BUY: Safestore (SAFE)

It is not just those selling houses that stand to benefit from a surge in property transactions, writes Emma Powell.

Self-storage specialist Safestore outperformed analyst earnings expectations during 2020, as both occupancy and average store rates improved.

Closing occupancy stood at 80.8 per cent at the end of October, up from 77.6 per cent on a like-for-like basis the same time the previous year. That included a record fourth-quarter performance in which 228,000 square feet of occupancy was added. Safestore has estimated that UK owner-occupied housing transactions drive around 10-15 per cent of the group’s new lets. However, the rise in online commerce also proved a boon to demand from business customers.

Meanwhile, the average store rate rose 2 per cent. Revenue collection has also been broadly in line with pre-pandemic norms, during the three months to October just over 98 per cent of revenues were collected within 30 days of the period end.

The figures follow a similarly strong performance from rival Big Yellow, which reported a 5.8 percentage point increase in closing occupancy to almost 86 per cent at the end of December. Domestic move-ins were up an annual 11 per cent during the final quarter, while business customers took an additional 18 per cent of space.

However, expectations of a slowdown in activity across the housing market and economic uncertainty have not dimmed Safestore’s expansion activity. Further new store openings are scheduled in Paris and Birmingham in 2021 and two development sites in London were acquired.

Financially, the group seems solid — the loan-to-value ratio reduced to 29 per cent and the interest coverage ratio stood at a multiple of nine. It has no borrowings to refinance before June 2023.

Analysts at Panmure Gordon forecast a 6 per cent rise in net asset value to 532p at the end of October this year, which leaves the shares trading at a 57 per cent hefty premium to forecast NAV. That is also a premium to peers Lok’nStore and Big Yellow, which is justified by the greater scale of its portfolio and greater degree of geographical diversification. The quality of the income warrants remaining bullish.

Dave Baxter: The ESG proxy war

It may have taken a full-blown pandemic to get us there, but the long-anticipated tipping point for ESG (Environmental, Social, and Governance) seems, finally, to have arrived.

Spurred by a bout of coronavirus era soul-searching and some decent performance figures, investors have piled into ESG-friendly funds in 2020. Investment Association data shows that UK investors put a net £6.7bn into what it categorises as “responsible” open-ended funds in the first three quarters of the year alone.

ESG approaches have been paying off on a company level, too. Sustainability-focused Impax Asset Management recently reported a breathtaking 24.8 per cent rise in assets under management in the final quarter of 2020, with the news helping to push the company’s market capitalisation past the £1bn mark. 

Liontrust Asset Management’s presence in the ESG space has paid its own dividends. In the final three months of the year its sustainable investments range displaced the firm’s popular Economic Advantage offerings (including Liontrust Special Situations Fund) as the company’s biggest product range by assets under management.

This is all heartening news for ESG fans, whether they are investing in line with their world views or a sense of where the best returns might lie. But those who wish to run a portfolio that makes a difference should remember that, in some areas, the industry could inevitably still do better on their behalf. This extends beyond investing alone, to the world of proxy voting.

The extent of the problem is captured by a recent ShareAction report, Voting Matters 2020, which assesses how a sample of the largest fund management firms in Europe, the UK and globally used proxy votes on social and climate issues last year. The report suggests that not all fund firms are fully using their clout to push companies on such matters: one in six asset managers from the sample did not use their votes in at least 10 per cent of the resolutions where they could have had a say.

While 10 per cent may not seem like much, it can still matter. Sheer strength of feeling can be demonstrated by the backing for a particular resolution, while some votes may well be failing by a small margin because of a few holdouts. As ShareAction notes, even a relatively low vote in favour of positive change can make a difference, as with a 2019 resolution on lobbying from BHP Billiton’s investors.

Importantly, standing apart from votes can deny a fund manager’s investors a voice. But some of the obstacles standing in the way of greater participation can be instructive. ShareAction notes that asset managers may hold back from voting if they are privately engaging with the company on such issues already.

Other reasons not to vote include, bizarrely, a sense that a company is a leader on the ESG front even if its efforts are not good enough — such as an oil and gas business doing more on climate issues than its peers. Fund firms may also back away from a vote if they think the proposed changes are too difficult for a company to implement — demonstrating some lingering tensions between positive change and a sense of business fundamentals.

Like many problems in the ESG space, it is likely this lack of participation will lessen over time and the situation should improve. But it reminds us that, for the truly committed ESG investor, your due diligence should go well beyond a fund’s biggest holdings and touch on whether the asset manager itself walks the walk.

Dave Baxter is deputy personal finance editor at Investors’ Chronicle