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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.

VALUATION

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.