Shares digital

Andy Wade of Seymour Pierce altered his recommendation on Game Group shares from buy to hold after two weeks of strong price performance, a period that saw the stock rise 23% to 239p. Following a dismal performance in 2005/6 the group has enjoyed two years of very strong growth. Wade is forecasting profits of £74 million, some 150% higher than the £29.5 million reported in the previous year.

In January the group received unconditional clearance for its acquisition of Gamestation. This deal should generate synergies of at least £7 million in the current financial year.

Last month the company reported that it should enjoy underlying growth of some 5% to 10% this year. However, comparatives are ‘particularly strong’ in the first quarter as the PS3 was launched in March 2007.

There is a strong pipeline of innovative software products to be launched over the next few months. That software enjoys stronger margins and the benefit from the Gamestation acquisition should ensure that gross margins will improve by between 50 and 100 basis points.

Following the March trading update Wade increased his 2008/9 forecast from £86 million to £96 million, implying EPS of 19.5p. Importantly he believes that profits will plateau in 2009/10. The market reacted positively to the March update, despite Wade’s note that the ‘scope for further upgrades’ is now ‘reduced’.

Wade does not deny that the group is one of the more attractive within the unpopular retail sector. Indeed he emphasises that he would not want clients to be short of the stock, which has been one of the firmest in the sector over the past year, beating the wider market by around 60%. Wade’s sole cavil concerns the valuation of the shares. At 227p they are selling on a PE of 11.6, a demanding rating within this unloved sector, especially as the yield is a minuscule 1.6%.

The company is due to update the market later this month on 29 April. It will then unveil the benefits from the Gamestation acquisition and comment on trading.