Baillie Gifford UK Growth Trust (LSE: BGUK) isn’t a conventional UK-focused investment trust packed with the usual FTSE 100 shares. Indeed, with a 6.7% weighting, its top holding today is Games Workshop (LSE: GAW).
The company only joined the FTSE 100 back in December, so it’s fair to say this is a bold pick from Baillie Gifford UK Growth Trust. It has been a fruitful one, though, as the stock has rocketed 51% over the past year.
Underappreciated business
Games Workshop designs, manufactures, and sells fantasy miniatures and tabletop games, most famously Warhammer 40,000 and Warhammer Age of Sigmar. It sells them through hundreds of its own branded stores globally, as well as online and via third-party retailers.
For many fans, painting the figures is the most enjoyable part of the hobby. The company has also given its kits to schools. According to the trust’s manager Iain McCombie, painting the miniatures helped improve children’s concentration, even those that were hyperactive.
Despite the strong share price performance, the trust thinks that Games Workshop is still underappreciated by many investors.
A lot of people still don’t take it seriously. They think it’s a bit of a joke. It’s a kind of hobbyist. It’s for what kids play. You know, how can that be a serious business?
Iain McCombie
However, the financials tell us that this is very much a serious business. Revenue has jumped from £257m in FY2019 to an expected £600m in FY2026 (which began in June). Earnings, free cash flow, and dividends have all grown strongly, while international expansion continues apace.
Profit margins are exceptional and the balance sheet is immaculate. The stock also offers a 2.7% dividend yield.
Valuable IP
Games Workshop is sitting on 30+ years of rich intellectual property (IP). It has signed a deal with Amazon to turn some of that into Warhammer TV content. This has the potential to attract a lot of new fans to the brand and hobby.
What’s interesting, however, is that it took the firm about one year to settle the terms with Amazon. As McCombie points out: “[T]hat negotiation took a long time because the Games Workshop management said…We really care about our IP, we don’t want this to be ruined by Amazon, and we want to make sure that the script and so on is going to fit very much into our heritage.”
This demonstrates how the company makes decisions based on the long-term success of the hobby, rather than chasing short-term profits.
Looking ahead
The stock’s forward price-to-earnings ratio is 31, which is a chunky premium to the wider FTSE 100. This valuation risk is heightened because many consumers are still struggling with the cost of living. While addictive, the Warhammer hobby isn’t cheap, so there’s a chance that sales slow in the near term.
Longer term though, I remain optimistic. There seems to be ample room to grow in Asia, where fantasy games remain very popular. I think the stock is worth considering.
I also think Baillie Gifford UK Growth Trust is worth a look, especially as it’s trading at a 10% discount to net asset value. While there’s always a risk that the discount could widen, the portfolio appears strong. Other top holdings include Auto Trader, Experian, Wise, and AJ Bell.
