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Character Group – fun for kids & for investors…
by Steve Moore

Shares in self-described “designers, developers and international distributor of toys, games and giftware”, Character Group (CCT) reached 540p in September 2017 after the company announced it had “been appointed the master toy distributor in United Kingdom and Ireland for the globally popular Pokémon brand”. However, post a trading update the next month the shares were sub 400p. Currently just over 500p following a further trading update, where next?…

Operations

The company has in-house and licenced ranges and exclusive distribution agreements for others. The former includes Peppa Pig, Stretch, Teletubbies and Scooby Doo and the latter Little Live Pets and Mashems. April-announced interim results saw the company emphasise;

“These core ranges will be strengthened as we add innovative product extensions to them. We continue to add exciting new ranges, such as the new line up of Pokémon products, which will be launched at retail this summer. We have also added to our offering, a collection of new ‘hot craze’ items, including Soft and Slo memory foam toys, Make your own Slime, Cup Cake Cuties and Mine iT. Impulse buying at the right price point is a growing trend and we have successfully tapped into this category with new ‘craze’ lines being sourced and introduced regularly.”

Historic Trading

The October 2017 trading update noted “a solid finish to the 2017 financial year” but that “our international and ‘FOB’ sales have been adversely effected by a combination of several factors, not least of which is one of the world’s largest toy retailers entering into Chapter 11 bankruptcy protection in the US and Canada”. That was Toys ‘R’ Us and saw;

“At this early stage of the group’s new financial year the board consider that, based on the latest sales and market data available to them, the group’s performance for the year ending 31 August 2018 is now expected to be significantly below current market estimates. Nevertheless… during 2018 we shall be introducing exceptionally exciting new products, many developed in-house which, together with the current product portfolio will, the directors believe, give the group its strongest ever product line up… The group anticipates returning to its previous growth pattern during the second half of the 2018 calendar year, and this ultimately is expected to be reflected in the financial performance for the year ending 31 August 2019.”

That saw earnings per share forecasts downgraded from circa 55p to sub 40p and from approaching 60p to just over 45p for the now current year. For the company’s year ended 31st August 2017, 52p was delivered.

Latest Results

The results for the half-year ending 28th February 2018 showed adjusted earnings per share down 38% on the corresponding previous year period to 17p, though cash (net) of £14.3 million, and current assets over total liabilities of £18.1 million. They stated that “the calendar year has started very encouragingly, with the established brands and new ranges selling through extremely well at retail… The directors remain optimistic that the business will see a return to its previous growth pattern during the second half of this financial year and this will be fully reflected and significantly strengthen the trading results for the financial year ending 31 August 2019”.

The shares responded positively – approaching 540p again but recently they have slipped back to current levels following a 14th September trading update. That though included, “the group has witnessed a return to its previous growth pattern during the second half. With Character’s UK domestic business delivering record sales, the trading results for the financial year ended 31 August 2018 will comfortably reach market expectations” and “we continue to witness positive listings and strong demand from our customers for our core ranges and new introductions. As a business, we feel confident of the prospects for the autumn/winter trading period, which includes the all-important Christmas season. This, we believe, will provide a solid foundation for the financial year ending 31 August 2019”.

Forecasts & Outlook

A broker to the company, Allenby Capital, is now looking for earnings per share for the year recently ended of 43.6p and, particularly noting the potential of Pokémon and the initial products only launched in the summer, considers 50p+ now feasible this year. Thus this suggests a current price/earnings multiple of around 10x, with a dividend yield of more than 5%.

There clearly is a very difficult retail environment to consider, though the company argues “with the combination of our collaborative culture, both within the group as well as in partnerships with our customers and suppliers, the agility of our business model in addressing changes and challenges within our market and the proven skills of our central management team, the board remains confident in the group’s ability to grow the business profitably and expand its presence both domestically and internationally in the years to come”. That is easy to say – but it does look to have navigated the collapse of Toys ‘R’ Us quite well given the immediate, significant impact.

Management

The management includes joint Managing Directors Kiran Shah and Jon Diver. With accountancy practice, industry and toy industry experience, Shah co-established the original business in 1991 and is a member of the Chartered Association of Chartered Certified Accountants. Diver joined the business in the same year following previous senior level marketing experience in the industry. He then became the company’s Marketing Director, developing the relationships with suppliers, including licensors and manufacturers. Shah has a 10.08% shareholding and Diver 6.39%.

Further Executive directors are the other founder Joe Kissane (2.36% shareholding), Far East Operations Managing Director Michael Hyde (1.46%) and Marketing Director Jerry Healy (0.19%). There are three non-executives; Chairman and other founder Richard King (1.58%) and David Harris (0.28%) and Clive Crouch (0.07%).

Evaluation

Allenby notes recent benefits from a focus on price competitive products (including ‘craze’ lines) and not being aligned to any particular film franchises and argues a fair value of 580p – “equivalent to an 11.5x FY19 PER and a 4.7% yield”. With it a house broker to the company (and with a results announcement scheduled for 29th November), it looks prudent to apply some caution. However, it certainly looks like there is some potential value here.

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