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.
Well positioned for profitable growth
Gear4music’s FY2020 results reflect the positive momentum of the company’s announcements so far this calendar year. The data re-confirm brisk sales growth but in our view improved profits and profitability is the salient story. Moreover, with an online distribution focus, a well sourced product range and clear evidence that its logistics are being run more efficiently, the company’s ability to deliver positive newsflow looks increasingly sustainable. FY2021 started on an exceptionally strong note.
EBITDA increased significantly to £7.8m in FY2020 from £2.3m in FY2019, which was a 13 months year. In addition, the FY2020 EBITDA figure comfortably exceeded the company’s latest guidance of “not less than £7.0m” issued on 23rd April 2020. The profit increase was driven by a combination of continued underlying sales growth, which was pre-announced as 9%, and crucially gross margin expansion from 22.8% to 25.9%. Margin strength reflects better pricing both for the company’s higher margin own brands and other brands.
Gear4music remains financially robust. The company reports that on-hand cash has improved: it was £7.8m at the end-2020 - again ahead of expectations - compared with £5.3m a year earlier. Net debt shrank in FY2020 to £5.5m from £7.5m at the end of the previous financial year with a trailing net debt/EBITDA ratio of only 0.7x. The business should remain cash positive going into FY2021.
The recent run of news was favourable and continues to be. Gear4music is reporting exceptionally strong trading in FY2021 Q1, having navigated the early operational challenges from Covid-19 and ensuring that it had all appropriate safeguards in place. Furthermore, management are clearly confident in the position and prospects of the business over and above any beneficial lockdown effects. Underlying sales growth is expected to accelerate in H1 and average out to a mid-teens pace in FY2021. We forecast +19% sales growth to £143.5m in FY2021 with £10.3m of EBITDA.
Gear4music’s attractions as a company which can generate mature market sales volume growth remain in place. Notably, its distribution model is arguably far more appropriate for an industry in which frequently “hobbyist” customers wish to maximise available choice, than that of traditional retailing. Since year-end the company’s sales performance was notably strong. Further ahead, business may benefit from a more pronounced shift to online retailing within the musical instrument sector.
Sales resilience and positive announcements for profitability were helpful for Gear4music’s share price in recent weeks. Yet, despite that recent positive share price momentum, the company’s £67m market cap still only represents around 50% of expected FY2021 sales revenue.
Investors may wish to note this momentum and undemanding rating when considering companies that are well placed to thrive as the UK emerges from the COVID-19 lockdown period.Download Now Missing Out Get our research first
WHY CHOOSE ED
"Many thanks to @equity_research for a superb Investor Forum. $BMK.L , $VLG.L & $VP.L all interesting companies. I recommend these events. "
"We cannot thank you enough for opening our eyes to private investors."
"MHP believes commissioned research is an important part of the toolkit to attract new investors and improve liquidity. We rate ED's analysts and research very highly as one of the leading providers in this space."
"One of the biggest problems private investors have, is getting access to broker research. It’s basically impossible for many investors. Therefore I feel some commissioned research is really important and a good investment for companies. In my experience ED are far more proactive than other firms in this space."
Blogger and Stockopedia Contributor
"There is a need now, more than ever before, for real insight and clarity to be brought to company messages for investors….I would strongly recommend Equity Development to the management of any company."
Small Cap Equity Salesman
"From early days as a private company through to being established on AIM, I have always been able to rely on ED for wise counsel, perceptive research and introductions to new, supportive shareholders."
"I would like to thank and congratulate you, particularly Liz, on your note. It’s short, sharp, pulls out the key issues and I believe will be a valuable asset for our retail outreach."
"The team at ED consistently produce high quality research and highlight profitable investment opportunities, an invaluable tool for small cap investors in this under researched space."
"I thoroughly enjoyed the investor evening again, and as before its good that you get such an interested audience who engage and ask us all decent questions."