Gear4music (Holdings) plc 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.


Getting Satisfaction in 2020
Published: Jun 26 2019

Gear4music matched market expectations in FY2019 after encountering well reported turbulence in the second half of its financial year.  A combination of greater focus on customer satisfaction and strong financial resources augurs well for an improved profit performance and associated shareholder value creation in FY2020.  The new fiscal year started well.  
The preliminary results' statement confirmed full year sales of £118.2m in the 13 months to 31st March 2019, which was consistent with the company’s 2nd April 2019 trading statement and compared with £80.1m in FY2018’s 12-month period.  Adjusted sales data – i.e. excluding March 2019 - showed a 37.2% gain in overall sales with UK and International revenue advancing by 33.0% and 42.5% respectively.  
Overall, profitability in FY2019 was in line with our own and market expectations and we leave our FY2020 sales and EBITDA forecasts broadly unchanged.  Gross profits in the 13-month period were £26.9m, compared with £20.3m in the 12-months of FY2018. However, gross margins fell by 260 basis points to 22.8%, which reflected the intensified well-flagged market competitiveness.  EBITDA was £2.3m, compared with £3.5m in FY2018. However, inferred H2 EBITDA margins rose from H1.  
The company’s balance sheet shows net assets of £18.7m little changed from a year earlier at £18.9m.  Net debt rose to £7.5m from £5.0m at the end of FY2018.  The balance remains tilted towards the longer term with only £3.2m due within one year. 
We welcome the company’s increased focus on profitability and the positive implications that will have on free cash flow.  In our view, an EV/sales ratio around 0.6x compared with the current 0.4x represents a realistic first stage of re-rating.  Based on our 2020 forecasts, the shares would have to rise to 350p to achieve this higher ratio.
Sales growth steals show as margins slim
Published: Apr 02 2019

Gear4music continues to deliver sales in line with market expectations and guides towards further expansion in FY2020.  However, some profitability issues (flagged in its 5th January 2019 trading statement) remain in place.  Near term, investor interest in Gear4music should focus on its brisk sales growth. 
Gear4music issued a trading statement today 2nd April 2019 that referred to FY2019. The central message is that sales growth remains on-track at a brisk pace but that profits disappointed although EBITDA should grow in FY2020.  Moreover, as G4M continues rapidly to gain market share, profitability should increase majorly in the longer term.
The company states that in FY2019 (i.e. in the 13 months to 31st March 2019), net sales revenue increased by 36% to £118.3m with Europe and International growing at a faster 41% pace than the 33% reported in the UK.  Domestic sales were 54% of the business.  FY2019 sales based on a 12-month year were £109.9m, which matched expectations.
As mentioned above, profitability continues to be under pressure. In the current financial year, we reduce our EBITDA forecast from £3.0m to £2.1m.  In the out years we shave our FY2020 EBITDA expectation from £4.9m to £4.2m and look for £6.5m in FY2021 – i.e. also lower than previous consensus of £7.5m to £8.0m.  However, we leave our sales revenue forecasts broadly unchanged at £139m and £170m respectively.
In terms of balance sheet pressures, Gear4music remains in reasonably good shape with £5m cash on hand.  Moreover, net debt is expected to be of the order of £9.0m at the close of FY2020 which implies a manageable net debt to EBTIDA ratio of around 2.1x and scope to reduce that much further in FY2021 as net debt is forecast to drop to £7.m.
The group reiterated the key reasons for profit disappointment in FY2019, notably that in the second half of the year gross margins were hurt by higher distribution costs that arose from constraints on warehouse capacity and increased courier cost inflation.  However, the longer-term sales outlook is unchanged – i.e. brisk growth. 
In our view, the central investment case for Gear4music remains brisk sales growth, both domestically and abroad, with the ability to execute that sales growth sustainably on a cash positive basis.  Underlying profitability tends to be confirmed by sustained mid-twenties gross margins and the group’s inherently cash positive nature.  At a 0.5x EV/sales valuation, the stock is arguably attractively valued given these qualities. 
Top line on song for further growth
Published: Jan 15 2019

Gear4music’s recent FY2019 profit warning prompted a stark share price reaction. However, there was no let-up in sales growth. As intended, Christmas market share improved at Gear4music and top-line expectations remain intact. Moreover, gross margins should end the year making progress on FY2018.
There are good reasons to be positive, which now include valuation. Gear4music’s 4th January 2019 trading statement prompted a sharp negative share price reaction. The company revised FY2019 EBITDA guidance downwards to beneath last year’s level as gross margins were squeezed in the company’s fiscal third quarter. But there was no downward steer on sales growth, which arguably remains central to the Gear4music investment case. Moreover, the company appears well on the way to addressing warehouse capacity constraints which were flagged in its latest statement.
Moreover, Gear4music’s product margins – a management priority - seem likely to trend higher in FY2019’s final couple of months. Gear4music is the UK’s market leader both online and overall for musical instruments with a clear first mover advantage in web-based sales. International adds an extra fillip. Europe is poised to be the larger region by FY2020. 
The post trading statement share price collapse in Gear4music implies a sizable EV/sales valuation de-rating. So far, estimates for sales have not been guided down. Furthermore, the outlook appears positive both near and longer term. As with other brisk sales growth online operators, EV/EBITDA and P/E ratios tend to be high by the standards of mainstream commercial companies. Gear4music was, and still is, no exception. 

Valuation at 0.4x FY2019 EV/sales should not, in our view, preclude investors who believe in the arguably robust top line growth story from backing the company.
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.  
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.
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.


Published: May 28 2018

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

Foreign buyers gorging on UK stocks

Document can be downloaded here: UK plc ‘going for a song’

Being a shareholder in a company that receives a juicy takeover offer is a marvellous feeling. Something that many fortunate investors have experienced over the past 3 years. Thanks to a spate of M&A bids by deep pocketed overseas buyers – partly triggered by the June 2016 Brexit result, which sent the £ tumbling and adversely affected the FTSE.

Consequently today, given this trend is unlikely to end anytime soon, we’ve highlighted 30 possible acquisition ideas in the attached research paper. Spilt equally between large and smallcap stocks – covering a broad selection of industries.

What’s more we believe most of these businesses are underpinned by strong fundamentals and substantial upside in the event of predatory interest.

According to Factset Mergerstat/BVR, the average bid premium paid for such deals between 2004-14 was 30% – with the figure trending upwards since the global financial crisis.

Happy investing. Published 27th August 2019