Game Digital beaten up after slashing dividend

Half-time results from video games retailer Game Digital disappointed investors as the 'rebasing' to a lower dividend and shifting consumer demands outweighed the beating of profits guidance issued in January.

January's guidance was admittedly a downgrade on the prior year but it was better than the company feared when it issued a profit warning just before Christmas.

For the 26 weeks ended 23 January, adjusted group earnings exceptional items, finance costs, depreciation and amortisation (adjusted EBITDA) came in at £33.1m, ahead of the £30m guidance but down 23% on the same period a year ago.

This was on revenue down 6.3% to £549.2m as UK market presented challenges, with Game's market share shrinking slightly to 32% from 33% a year before.

Within the content category, sales of new format physical software such as PlayStation 4 and Xbox One were strong, up 25% in the half, but this was more than offset by the 58.5% fall in old format software sales from PlayStation 3 and Xbox 360, as consumer demand for these products declined.

But there was encouraging progress from management's plans to diversify, with roughly a third of the group's gross profit delivered from the Accessories, 'Toys-to-life' & eSports division, preowned mobile phones and tablets ('GAMEtronics') and digital content.

In Spain, the group enjoyed continued strong performance, with like-for-like sales up 16.1% on a local currency basis, EBITDA up 4.5% and market share up to 38% from 36%.

Group adjusted basic earnings per share shrank 32% to 12.2p, while the rebasing of the interim dividend saw it cut by three quarters to 1.67p a share, which should represent roughly a third of the anticipated 5p full year payout.

With trading in the second half of the year remaining in line with internal expectations, management expects to deliver a "small, positive EBITDA" for the 27 weeks ending 30 July.

Broker Liberum was impressed by the improvement in sales trends since the end of December and management's strategic diversification plans.

"The company is in the process of renewing its short term financing arrangements to provide greater flexibility and fund an increase in stock to support anticipated demand in growing categories such as GAMEtronics," analysts said, adding that investment in the opportunities at Multiplay reduced outer year forecasts but could unlock long term profits.

"Rebasing the dividend is sensible and gives the company the scope for a progressive dividend policy, in our view."

Shares were down 5% on the day to 120.5p just before the close, recovering from lows around 112p earlier in the session.