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G4M - HITTING THE RIGHT NOTES - 17/11/20

G4M, the UK based online retailer of musical instruments and sound systems hit the right note this morning, when it delivered excellent Interim results that has resulted in broker N+1 Singer once more upgrading numbers.

Revenue increased by a thumping 42% or £20.8m to £70.2m with gross profit jumping 61% to £20.1m, whilst EBITDA was also up by a massive 325% to £8.5m against the corresponding periods £2m. Clearly, G4M is heading for an excellent full year performance that commenced earlier in the year on the back of the first lockdown, but importantly, has continued the momentum as it demonstrates ongoing progress following through. Speaking with management this morning, it is apparent that despite obviously being very pleased with how the year has gone, there is an underlying drive to aggressively push the business on further, where CEO Andrew Wass says that there is much to concentrate on and go for in the years ahead.

For now though, it appears that one of the most pleasing aspects for the CEO and his team, are the fruits of the seeds that were previously sown in terms of a reassessment of its strategy and the addressing of both pricing and margins across the business. “We have really learnt a lot of things this year” says Wass, “and there has been a great opportunity for us with new customers and where the improvement on margins has been really stronger than what it was last year, so we are very confident going forward.

“We took a big step on the financials and really fixed the pricing and margins” he adds, the results of which has positioned G4M well to further execute on delivery.

In particular, its own brands demonstrated significant progress with a 570bps increase, boding well for the future with continued growth.   Across the UK, the company appears to be in a very sweet spot now, where as the UK’s online leader it now boasts an 8.6% share of what is a really fragmented market place.

When G4M came to the market Thomann the large and dominant German online business was the UK leader says Wass, however having substantially grown its market share, the home player has since surpassed that and taken up the mantle. Commenting further Wass said “we are really just doing the best job we can and making the most of every opportunity and growing our own brand is very much part of that”.

    Sitting on what is now a solid balance sheet with £26.6m in net assets and £5.4m cash recorded at what was a seasonal low-point of the year, I ask the questions as to whether organic growth will remain the sole driver for G4M, or as to whether acquisitions could now feature.

“It’s an interesting one this” says the CEO, adding, “we are certainly in a position to possibly consider something, but it probably wouldn’t be a competitor, most likely more along the lines of legacy brands, which we could then add into our portfolio and grow”.   G4M’s growth isn’t confined to the UK though and managements view on driving that beyond these shores will no doubt resonate with holders of the shares who are looking to the longer term for ongoing and sustainable progress.

Having recorded overall growth rate in the UK to 30th September of 42.1%, there was also an impressive performance on the International front with a 36.5% figure being achieved. Europe is a key target for Wass and his team, where he comments, “there is so much for us to play for in Europe and there is no reason at all why we can’t take more of that market share, as an example we have made great progress across Scandinavia”.   Additionally, they already have a number of hubs in Europe to service demand and do not have worries or concerns around Brexit, where Wass confirmed that they have been planning for such an eventuality for some years. The US though, is another interesting territory that could feature for growth moving forward being a massive $7.8bn market, but Wass is cautious at this stage, commenting that this requires a lot of thought and the taking of a very big step.

In the same breath though he points out that the Guitar Centre the largest musical retailer in the US has all sorts of problems and now looks set to go into Administration. That could, leave something of a void and should G4M look to expand its footprint further, arguably provide a serious growth opportunity, although one suspects that Wass would want to tick all the boxes before committing to such a route. As we approach the key Christmas period, the signs remain and appear extremely positive for the company and Wass says that they are continuing to witness very strong sales and growth and although this lockdown is not quite the same as earlier in the year it would appear that the G4M team is confident on prospects. Winning new and retaining existing customers is pivotal in the strategy and the company has previously invested in digital innovation and software development to further grow market share and that seems to be paying off now.

As part of that strategy there is an increasing engagement via mobile platform with revenue derived from that source moving from £13.8m in 2019, to last years £20.3m and which is expected to hit £27.5m for full year 2021. That sees G4M better placed and positioned than many of its smaller independent competitors who have less advanced routes to market. G4M’s impressive performance has seen strong sales across the spectrum marked by Studio which includes the likes of headphones and mixers jumping by 84% and Guitars delivering 74% growth.

Only Live PA saw an understandable reduction by 19% as live events have been largely put on hold, but one could argue, that there is plenty of pent up demand in that area. Looking at the now revised full year 2021 numbers N+1 Singer is today forecasting revenue coming out at £145m with EBITDA of £13.7m and adjusted pre-tax profits of £8.5m providing EPS of 33.7p.

At the current price that puts the stock on a PER of 21, but the broker does highlight risk to the upside in H2 revenue (+5%) and EBITDA margin (5.9%) assumptions on good execution over the remainder of the year. Of course, detractors may argue that this year has been an exception and point to expectations for 2022 as showing a reduction on numbers in comparison with the year in progress, which evidently puts the stock on a more punchy forward rating. Wass points out, that the existing numbers forecast were actually set back in March and they haven’t been revisited, as its difficult to predict given what has been unfolding and they have really been concentrated and focused on this year. However, he maintains a confident but cautious approach to the next year and sees the business as continuing to be well placed. Peel Hunt which also covers the stock adds further on this area in that whilst conditions are not going to be as favourable in FY22 as they were in FY21, G4M’s relative position is a very strong one and its growth prospects are impressive.

The underlying market is growing steadily and shifting online, and G4M has the depth of pockets, the technological capability and the relationships with suppliers to make sure it continues to take full advantage. They add that "If we think of G4M as a retailer with £150m of sales growing at 20% pa, with stable high single-digit margins, we don’t think it’s too much of a stretch to hope for 1x sales and that would imply 825p as a target price. Even that lacks a bit of imagination". All in all from this writers view and as a holder of the shares G4M looks to be a transformed and reinvigorated business, even allowing for the undoubted positive effect from the lockdown issues. That, rather than being considered as a pure one off, may actually prove to be a catalyst for long term growth in revenue and profit working hand in hand with a shifted strategy to really drive the business on. Certainly there is plenty on offer to accelerate growth both in the near and longer term as evidenced by the potential across Europe and the recent progress that has been made. As yet, it is hard to define the level of casualties across the sector in the High St environment, but that is likely to emerge in time and thus provide for further organic growth opportunities for the company which has already seen strong new customer engagement and retention throughout this year.

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irene_john
Nov 17, 2020

A superb performance for G4M so far this year which looks likely to continue into 2022. There seems to be no stopping for this Company which has clearly targeted new and exciting business opportunities in the future. So glad I invested earlier and have seen

some really good profits, I have been tempted along the way to top slice but so far have resisted. A really good well written article - thank you.

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