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STRIKING THE RIGHT CHORD WITH G4M - 01/11/20

The latest lockdown news hardly comes as a surprise and as a result, it looks like specific sectors are likely to mirror the previous wild swings from earlier this year, with a distinct split on those suffering severely to others that are actually prospering.

One company that benefitted greatly a result of the last lockdown and as a result has seen its share price surge is Gear4Music (G4M), which saw me taking a position around the £2.80p level after the company had provided positive updates to the market and which in turn resulted in broker upgrades.

In terms of its operations the company does exactly what the name implies, by providing a massive range of musical instruments via its online format, which sees it as the UK’s number one player in the market.


It is also active across Europe, where there is plenty to aim for to drive further growth in a market that sees one major German player, alongside many smaller operators in a largely fragmented market.

G4M currently accounts for around 1.5% of this market, but that has been increasing as buying habits there have mirrored the UK, with surging sales, particularly through lockdown.

 Back in June of this year the company delivered excellent preliminary results which saw a £120m in revenue being registered, EBITDA of £6.4m and adjusted pre-tax profits of £3.5m with EPS of 12.8p.  

Importantly, cash generation such a key measure for investors registered a significant turning point and that resulted in a reduction of net debt to £5.6m which was a marked fall on the forecast £7.5m as had been anticipated by the broker Singer.

At the time, I spoke with CEO and founder Andrew Wass alongside the CFO Chris Scott where there was clearly a very positive and pleasing view on the numbers delivered, although they added that there was more to do to further drive the business forward.

The mix of both confidence and a firm grounding has seen the G4M business accelerate further which has a seen a super Trading Update delivered to the market just last month that has also resulted in another upgrade.

The shares initially spiked to £7.00 each before retracing in keeping with the wider market and now sit at £6.20p which is looking tempting for a small top up for me.


Alongside the favourable conditions that have clearly impacted on smaller High St. competition the company has also really got its act together on margins and a strategy that has seen an exit from chasing high volume sales.

When we spoke Wass sounded a very positive note on both current and future prospects where he said “we were always confident of turning it around and ultimately the investment we made into high margin growth has delivered”.

With the move away from volume and low margins which has clearly been delivered, the CEO also added “It is very much about driving profit and it’s all about growing that profit, something we are absolutely going to retain”.

And thus far that has clearly been the case, with the latest update stating that the strong trading momentum has continued into October ahead of G4M’s  traditional Christmas peak season as it has recorded sales growth for the first six months of 42% to £70m against last year’s corresponding periods £49.4m.

Gross profit delivered an excellent result too surging by 60% to £20m from last year’s £12.5m resulting in adjusted pre-tax profit of £3.3m.


As the trend has continued well after the easing of restrictions through the summer, the announced reversal into tighter restrictions once more is likely to benefit G4M again, particularly as we approach Christmas which will clearly take on a different feel.

No doubt smaller independents are going to seriously feel the effects once more and that is without doubt likely to see G4M picking up new business alongside retaining its long term customers in conjunction with those that have only recently embraced its offering.

Broker Singer upgraded its forecasts again last month on the back of the update and is now looking for full year 2021 revenue of £143.9m with adjusted EBITDA at £12.5m and adjusted pre-tax profits of £7.7m.

The latter figure is more than double last years delivered number and shows just how successful the business has been, boding well for the future which even when some sense of normality eventually arrives should see G4M in a prime operational position.


Despite that broker upgrade, the numbers may yet prove conservative and lead to a further upgrade, particularly in light of the forthcoming closures of the musical instrument High St retailers.


At present Singer is forecasting 29.1p EPS that sees G4M trading on a PER of 21, which perhaps looks up with events for now.

However, the momentum has remained strong and shows no sign of abating and with France and Germany having also taken the decision to lockdown once again, it seems highly likely that the buying trend seen earlier this year will be repeated and any positive effect on trading potential isn’t yet reflected in the upgraded forecast.


Although the shares have performed extremely well since March of this year and may look as suggested for now fairly priced, it is worth comparing it to peers in terms of the EV/EBITDA, where G4M still trades at a 42% discount to the peer group where the quality of earnings and growth prospects arguably look weaker.

This, according to Singer provides for a share price rating of £11.50p, if the shares were to trade on that peer group average.

Achieving such a figure may be some way off, but if there is further positive news come the release of the interim results later this month, then we could see a return to a previously recorded high of £8.10p registered in 2018.

It was certainly apparent when I spoke with Wass in the summer that much has been achieved and put in place to ensure that the growth momentum continues for the longer term. The CEO telling me then that he sees plenty of further growth opportunities across the market space and highlights their bespoke digital platform which was built from scratch and is now poised for further and potentially significant progress. “A couple of years back we began building across the digital product space which offers continued and improving customer experiences and we are now at a point of accelerating that with specific digital products that will also provide for a slick customer experience.” This will amongst others, see the likes of its mobile website development with enhanced payment options running alongside extensive customer communication and the personalisation of tools which will also be assisted further down the line by the introduction of transformational ways customers can purchase products from G4M music websites. Although G4M had already seen positive momentum prior to the various lockdowns, the enforced isolation has clearly had a positive effect on the business and that continued into June and up to and including October.

Around the earlier Covid induced restrictions Wass had commented “When Italy went into lockdown we quickly saw a positive effect and we were soon very busy and that surge subsequently continued, it followed a pattern and we have continued to be busy”. Whilst he said then that there was understandably less volume on live stands and PA systems due to the closing of event premises, other categories such as those serving podcasts and home related music had been doing incredibly well, so it will be interesting to hear more come the interim results when I hope to catch up with him again. With its pole position in the UK, G4M also as mentioned earlier enjoys exposure across Europe with hubs to serve the various markets and there is plenty more to do and business to go for  the CEO had stated.

When I Touched upon that thorny issue of a potential no deal Brexit, Wass said he believes G4M is better placed than many and has planned for such an event should it arise where it looks as though with two well established hubs in key countries such a scenario has been largely mitigated.

There is much to warm to with G4M and despite the shares on the face of things looking fairly priced, there are a number of positive factors that suggest the shares may have a lot further to go in due course.


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