Gear4music (Holdings) plc

http://www.gear4musicplc.com/ TICKER: G4M     EXCHANGE: AIM

Operating from a Head Office in York, and Distribution Centres and showrooms in York, Sweden and Germany, the Group sells own-brand musical instruments and music equipment alongside premium third-party brands including Fender, Yamaha and Roland, to customers ranging from beginners to musical enthusiasts and professionals, in the UK, Europe and, more recently, into the Rest of the World.

LATEST REPORTS

 
Interims justify FY2019 profit expectations
Published: Oct 16 2018

Gear4music sells own-brand musical instruments and music equipment alongside premium third-party brands including Fender, Yamaha and Roland, to customers ranging from beginners to musical enthusiasts and professionals, in the UK, Europe and, more recently, into the Rest of the World.
Their interim results were released this morning and reconfirmed both underlying sales growth for the business and a view that full year profits will meet expectations.  The company’s second half includes the all-important Christmas period.  Moreover, international sales appear set to nudge ahead of UK in the six months.  Clearly, sales trends remain strongly positive, which should benefit both future profit growth and valuation.  
Despite a half-year fall in EBITDA to £652k from £717k a year before, Gear4music reaffirmed FY2019 expectations.  This optimism about full year profitability is driven by recent revenue growth and a gross margin drop contained to only c. 100 basis points.  Moreover, the company has made ongoing operational and commercial progress.  We expect FY2019 H2 margins to be 25.3% compared with 22.7% in H1 and 25.6% in the same period last year.
Gear4music’s commitment to marketing spend also augurs well for sales growth momentum. As a portion of sales it was 8.2% in the half, slightly higher than the 8.1% a year earlier.  Labour costs increased by 31% to £3.75m.  However, they decreased as a portion of sales from 9.2% to 8.8% - this is consistent with an overall commitment to cost control. Importantly, both marketing and labour spend drive business.
Encouragingly, the group generates its revenue in mature markets – where economic risks are relatively low – and maintains a strong growth momentum.  Its ambition to be a leading global musical instruments retailer appears justified by today’s results and update. 
Based on our full year revenue and EBITDA forecasts, which we updated at the time of 7th September trading update, Gear4music trades on a 1.0x EV/sales ratio which looks undemanding.
 
Strong H1 sales - Growth outlook upbeat
Published: Sep 07 2018

Gear4music sells own-brand musical instruments and music equipment alongside premium third-party brands including Fender, Yamaha and Roland, to customers ranging from beginners to musical enthusiasts and professionals, in the UK, Europe and, more recently, into the Rest of the World.
It reported strong first half sales growth in its trading statement today as both UK and Europe made brisk gains and the combined H1 figure beat current expectations.   A higher full year number than originally envisaged seems likely, although the company did encounter some margin pressure.
First half sales were £42.5m, which represents a sizable, better than expected 36% increase on the first half of FY2018.  UK sales increased by 34% to £24.0m and European sales by 39% to £18.5m.  Based on the current run rates, European sales may become larger than domestic in the second half.
In terms of forecasts, we look to increase our own FY2019 sales estimate from £104.2m to £110.0m.  If we are correct, the implied growth rates in the UK and Europe will be 25% and 50% respectively. The company separately announced that it will move from an end-February to an end-March year-end with FY2019 being a 13-month year.  However, our forecasts continue to refer to a 12 months’ period. 
Gear4Music encountered some competitive pressures in the period, which may lead to some slippage in gross margins.  However, further ahead the company is well placed to recover profitability through brisk sales growth, ongoing cost control and the inevitable margin benefits which arise from channel shift in favour of on-line.  To be prudent we trim our FY2019 EBITDA forecast slightly from £4.975m to £4.900m.  
Overall, Gear4Music looks well placed to continue to enjoy brisk, profitable sales growth and to be well rewarded in terms of its share price.  The company’s optically high EV/EBITDA and P/E ratios are not unusual for on-line providers which deliver rapid sales growth.  Moreover, the company’s EV/sales ratio does not appear particularly demanding.
 
AGM update - Growth on Cue
Published: Jul 27 2018

Gear4music plc, the largest UK based retailer of musical instruments and music equipment, issued a brief update this morning ahead of its AGM, which is scheduled today for 3pm.   Despite what is considered to be a competitive retail environment, revenue growth continues to be strong.  Moreover, the projects to relocate the Swedish distribution centre and upgrade UK distribution are on track.  The company reaffirmed guidance.
In our view, Gear4music - Britain’s largest online musical instrument retailer - is well placed to continue generating rapid revenue growth. UK online sales appear positioned to gain further share of a musical instrument market that enjoys some steady growth. 
Furthermore, while market conditions are cited as competitive it should be noted that UK retail sales trends held firm in recent months.  According to ONS data retail sales volumes in the 3 months to June 2018 increased by 2.8% from a year earlier while value increased by 5.1%.  Additionally, non-food online sales, which plays to Gear4music’s strengths, rose by an impressive 20.8% in the year to June.
Equity Development’s full year forecasts are for FY2019 (February year-end) revenue to increase by 30.1% to £104.2m, EBIT margins to increase from 2.4% to 2.6% and EPS to rise impressively from 6.7p to 10.1p.   
If our assessment is correct, the shares trade on a 65x prospective P/E ratio that is not unusually high by the standards of Gear4music’s online peers.  The implied 1.8x EV/sales ratio represents a discount to this group.  
 
Geared4growth
Published: May 29 2018

Gear4music - Britain’s largest online musical instrument retailer - is well placed to continue generating rapid revenue growth.  UK online sales appear positioned to gain further share of a musical instrument market which enjoys some steady growth.  Moreover, the AIM-listed company is still in a relatively early stage of rapid Continental European expansion.  With a clear cut growth strategy forged by an experienced management team, strong brand credentials and positive scores for its commercial KPIs, investment prospects look bright.
Despite being overall UK market leader with a share of around 6%, Gear4music’s domestic performance remains an important driver of company growth. UK revenue advanced by 27% in FY2018, reflecting more hits for its website and better conversion.  Investment in technology and a 20% rise in products listed to 44,700 items continue to spur growth.
Continental Europe should be a major opportunity for Gear4music to sustain rapid revenue growth.  Overall European market size is estimated to be £4.3bn for the top ten markets with 82% of business transacted outside the UK.  Gear4music has already progressed rapidly on the continent, which in FY2018 generated 45% of group sales revenue. Further ahead, other geographic regions – including the USA – may also become more important.
Underlying demand for musical instruments continues to grow ahead of overall consumption.  With a strong “hobbyist” following and widespread affordability, this trend should remain in place.  More importantly, online continues to gain share from premises based retail.  Gear4music is market leader in the UK online market with sales growth that continues to outstrip its category and rate of channel shift.
Valuation 
Gear4music trades on a 71.2x FY2019 P/E, a 1.5x EV/sales ratio and 44.7x EV/EBITDA based on our expectations for next year.  None of these multiples is unusual in the context of the company’s key UK on-line peers. Additionally, Gear4music is profitable at both EBIT and EPS level and has been EBITDA positive since listing in June 2015.
 
Geared4growth
Published: May 28 2018

Chris Wickham discusses the opportunities at Gear4music, both domestic and international.

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