Game Digital

With the dominance of Amazon and the rise in online retailing, traditional high street stores that have failed to establish a strong and niche online presence have been hit hard. Steep share price declines have seen more and more retail stocks developing deep value characteristics. Game Digital is one of those retailers.

The video game and console retailer went into administration in 2012 and was bought out by private equity firm Opcapita in a deal backed by US activist hedge fund Elliott. After some restructuring they were re-listed on the LSE, and Opcapita still owns 38% of Game Digital with a strong influence on the board of directors.

Mike Ashley has also recently increased his stake in Game to 26%, which has seen Sports Direct and the Belong arenas operated by Game begin a new strategic parternship.

As always with deep value investments the attraction of Game lies not in its uncertain future profitability potential, but in the cheap ratios by which the company is valued compared to its net liquid assets.

From the balance sheet on 28th July 2018 current assets totalled £157m, of which £78m is inventories, £20m receivables, and £58m in cash. All liabilities totalled £101m, the majority of which is trade payables. This leaves our net current asset value at £56m or 32.5p per share.

When I first started buying the shares at 29p this represented a 10% discount to net working capital, which to me presented a prudent haircut to the £78m inventory. Note that the cash alone equates to 33.5p per share, meaning at 29p the stock has been trading at a 13.5% discount to the cash in its bank account.

The recent move to develop their Belong brand, which operates live gaming arenas is encouraging and has the potential for profitable expansion. How successful this new venture will be is impossible to say, but the margin of safety here is sufficient to generate the asymmetric payoffs we are seeking from deep value investments.

The share price has since provided opportunities to buy more stock at below the net current asset value. Most recently in December the company announced that they were going to re-list their shares on the Alternative Investment Market. For some reason this was taken as a negative for the price, despite having no impact on the underlying value of the company.

At the time of writing the shares are currently trading at 24p per share.