Character Group Share Blog – Final Results Year Ended 2018

Character has now released their final results for the year ended 2018.

Revenues declined when compared to last year as a £356K growth in UK revenue was more than offset by a £9.4M decrease in ROW revenue.  Cost of inventories was down £9.3M, amortisation decreased by £506K and there was a £1.3M positive swing to a hedging income, although there was a £1.3M increase in the inventory write down charge and other cost of sales grew by £1.9M to give a gross profit £1.2M lower.  Selling and distribution costs were up £408K and other admin costs increased by £386K but finance costs were down £113K and the tax charge was £310K lower which meant that the profit for the year was £9.5M, a decline of £1.5M year on year.

When compared to the end point of last year, total assets increased by £7.5M driven by a £5.9M growth in cash and a £1.9M increase in inventories, partially offset by a £771K decline in trade receivables.  Total liabilities also increased during the year as a £1.2M decrease in income tax payables and a £797K fall in import loans was more than offset by a £2.6M growth in finance advances and a £2.4M increase in trade payables.  The end result was a net tangible asset level of £31M, a growth of £4.8M year on year.

Before movements in working capital, cash profits declined by £2.5M to £13.6M.  There was a modest cash inflow from working capital compared to a cash outflow last time but after tax payments increased by £2.1M the net cash from operations was £10.7M, a decline of £2.1M year on year.  The group spent £1.6M intangible assets along with £327K on fixed assets to give a free cash flow of £8.8M.  Of this, £4.4M was spent on dividends but a £1.4M cancellation of shares was offset by £1.3M of new share proceeds which meant that the cash flow was £4.3M and the cash level at the year-end stood at £15.6M.

Trading during the first half of the year was difficult, mainly due to the failure of Toys R Us.  During the second half, however, they were able to produce record sales within the UK domestic business. The core product ranges such as Peppa Pig, Little Live Pets, Teletubbies and Stretch have remained in demand in demand and the additions that they have made to these ranges during the year have been well received by customers with sales continuing to grow.  This has been complemented by the “craze” lines such as Soft n Slow Squishies, Cakepop Cuties and Craz Slimy.  They will be introducing new products and range extensions to their portfolio in the coming months.

After the year-end the group completed the acquisition of a 55% shareholding in Proxy, a Danish toy distributor.  The purchase price comprised an initial cash consideration of £300K with further earn out consideration of up to £3M payable in each year to 2020.  The remaining 45% of the equity is held by the CEO and CFO.  The business sources and secures exclusive rights to toy products and then markets and sells them to retailers in the Nordic region. 

This acquisition enables the group to further extend its European reach, to offer a more compelling distribution proposition for toy companies and brand owners seeking EU market access and to provide a vehicle for growth of their non-UK sales of their own developed ranges.  It also potentially gives the group frictionless access to EU markets post-Brexit.  Since completion of the acquisition, Proxy has secured the exclusive distribution rights for the Nordic region of the Funko range including its Fortnite figurines.  The acquisition is expected to be earnings enhancing in the first full year in the enlarged group. 

Going forward the new financial year has started well and in line with management expectations.  The board are confident in their prospects for the autumn/winter trading period.  In addition, they believe there is considerable scope to progress with joint initiatives in product development and marketing with the Proxy team which should enable them to increase further their respective current market shares in 2019 and beyond.  Macroeconomic factors such as Brexit and the performance of the UK economy generally will continue to dictate market behaviour in the coming months, however.

At the current share price the shares are trading on a PE ratio of 11.7 which falls to 10.9 on next year’s consensus forecast.  After a 21% increase in the dividend, the shares are yielding 4.4% which increases to 4.6% on next year’s forecast.  At the year-end the group had a net cash position of £15.6M compared to £11.5M at the end of last year.

On the 18th January the group released a trading update.  The positive momentum at the end of last year has continued.  Despite disappointing figures reported by a number of retailers, the group’s products maintained their popularity through the Christmas period, selling well at retail and demand for their products is continuing.  Their international sales, excluding the US, remain steady, but US sales continue to be challenging.  They are making good progress though, which the board believe will become evident in the second half of the year.

Trading at Proxy is benefiting from being part of the group, with logistical support in the Far East and a substantial increase in product ranges available for it to distribute in the Nordics.  In November, however, one of Proxy’s major customers filed for bankruptcy, though there is news of a potential buyer.  This has created a short term setback, although the impact on group profits will be minimal.  Overall the group’s performance and prospects remain in line with market consensus.

Overall then this was a bit of a mixed year for the group.  Profits declined, as did the operating cash flow, although there was still a good amount of free cash generated and net assets increased.  The first half was tough due to the failure of Toys R Us but the second half has been much better, particularly in the UK.  Conditions are still challenging in the US but overall Christmas trading was fine and with a forward PE of 10.9 and yield of 4.6% these shares look good value to me.

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