Game Digital receives downgrade from Canaccord after profit warning

Canaccord Genuity has downgraded Game Digital to ‘hold’ from ‘buy’ after the company warned first half earnings would be lower than the previous year.

The specialist video games retailer said adjusted operating profit for the 26 weeks ending 23 January 2016 will be around £30m, down from £43m in the same period a year ago following disappointing sales since the start of school Christmas holidays.

In an update for the 21-week period ended 19 December, it said trading conditions in the UK retail market have been challenging with total sales for the video games market down 13.5% year-on-year.

Revenue, or total gross transaction value as Game calls it, of £466.8m was down 6.7%, largely due to the reduction in low margin console sales, down 20.3%.

“Game is just heading into its peak sales period, so this is a particularly disappointing update,” Canaccord said.

“Given the extent of first half weakness, we downgrade full-year 2016 forecast (FY16F) for pre-tax profit/earnings per share from £38.9m/18.1p to £21.7m/10.1p, a 44% downgrade. At this stage we maintain a flat dividend at 14.7p; but there is clearly some risk of a dividend cut (despite £47m of projected FY16F year end net cash), given that it is uncovered by projected earnings in FY16F and FY17F.”

The broker lowered its target price to 183p from 270p.

Shares plunged 38.67% to 126.19 at 1501 GMT.