Online musical instruments retailer Gear4music (G4M:AIM) remains a business very much on song. Chief executive Andrew Wass is now confident of delivering profits for the year marginally ahead of its increased expectations signalled in January.
You would assume that is very good news for the share price. However, the stock cheapens 10p to 665p as investors take some profit following a recent strong run.
York-headquartered Gear4music is a retail structural winner selling own-brand instruments as well as premium third party brands including Fender, Yamaha and Roland.
At the foothills of growth in a fragmented market, Gear4music is also regarded as a Brexit-busting growth stock, exports to Europe having received a boost due to sterling weakness in the wake of the EU vote.
WASS’ EUROVISION JOY
Encouragingly today, Wass reports a 58% increase in total like-for-like sales to more than £56.1m for the year to 28 February 2017, reflecting continued strong growth in the UK and Europe.
One key takeaway is the 186% Scandinavian revenue growth generated between November 2016, when Gear4music’s Swedish distribution centre opened, and February of this year, while Wass also confirms a German hub is now operational.
WHAT DO THE ANALYSTS THINK?
Panmure Gordon analyst Peter Smedley maintains his ‘buy’ rating following today’s update, which ‘delivers a marginal but nevertheless pleasing positive profit surprise relative to our pre-tax profit expectations which had been raised by 20% just less than two months ago.
‘This new positive profit surprise is driven principally by strong cost control despite significant ongoing investment into G4M’s infrastructure ahead of future growth, whilst G4M’s sales continued their strong growth in both the UK and Europe/Rest of World in the seasonally quiet January and February.’
Smedley continues: ‘As flagged previously, the company’s ethos of investing in infrastructure ahead of future growth will be a key feature particularly in the 2018 financial year but also beyond.
‘We note therefore that two such pivotal investments in the 2017 financial year, namely the two local European logistics hubs in Sweden and Germany, are operational with early signs that G4M’s move to replicate its best-in-class delivery and services proposition to non-UK markets is already supporting top line growth internationally.’
WHAT'S NEXT?
The Panmure Gordon analyst points out that his 600p price target has been comprehensively surpassed, possibly a factor in today’s share price reverse, and adds: ‘We will use the full year results on May 9th to reflect today’s small positive profit surprise, revisit our 2018 and 2019 forecasts, introduce 2020 forecasts, and review our target price.’
For the time being, Smedley forecasts growth in pre-tax profit from £600,000 to £2.4m for the year to February2017, rising to £2.9m and £3.7m for 2018 and 2019 respectively.
