Character has now released its interim results for the year ending 2015.
When compared to the first half of last year, revenues increased by £11.3M and with a much smaller increase in cost of sales, gross profit increased by £7.9M. Selling and distribution costs then increased by £670K and admin costs were also up to give an operating profit some £5.4M higher than last time. A decline in finance costs was more than offset by an increase in the tax bill to give a profit for the half year of £7.5M, an increase of £5M. It should be noted, however, that these results are flattered because they include a £1.5M mark to market adjustment to the derivative financial instruments compared to a £2.9M charge last year so adjusting for this, pre-tax profits increased by just £1M to £6M.
Due to the seasonality of the business I have compared the balance sheet to the end of the first half of 2014. Over the year, total assets increased by £3.7M driven by an £8M growth in cash levels, partially offset by a £3M fall in receivables and a £552K decline in deferred tax assets. Total liabilities were broadly flat year on year as a £2.4M fall in derivative financial instrument liabilities and a £907K decline in short term borrowings was offset by a £2.9M increase in payables to give a net asset level of £11.4M, a decent £3.7M increase, although it should be noted that receivables plus inventories, although still higher than payables, saw a reduction year on year.
Before movements in working capital, cash profits increased by £768K to £8.1M. A large decline in receivables and fall in inventories more than offset the change in payables to give net cash from operations of £15.9M, a £9.8M increase year on year. This was more than enough to pay for the £822K of development costs and £144K of capital expenditure to give an impressive free cash flow of £15M. Some £6.1M was spent on share buy-backs and only £838K was spent on dividends to give a cash flow for the half year of £8.9M.
During the half year period, the group’s market share has continued to rise with the strong sales at consumer level continuing through the crucial Christmas period which gave rise to a result that was above management expectations. The long standing licensed collections such as Peppa Pig, Dr Who, Scooby Doo, Fireman Sam and Weebles have been in the group’s portfolio for a number of years and have seen extensive development for 2015, including additional and innovative toys within the brands. The more recent brands to be added to the product portfolio such as Teksta, the Zelfs, Shimmer ‘n’ Sparkle, Little Live Pets and Minecraft have now established themselves in the market.
New products are being added to the portfolio soon with Clangers being introduced in April 2015 and Ugglys Pet Shop being introduced in June 2015. The Group are also launching Yummy Mummies which is a new children’s cookery craft collection based on a molecular gastronomy concept which is already a web and YouTube hit in the Far East which sounds interesting. Also, the group has been awarded the global master toy partner for Teletubbies which is currently under development and expected to be launched and marketed in early 2016 following the broadcast of the new TV series on the BBC in late 2015.
One of the group’s subsidiaries has been recognised as “Toy Supplier for the Year” at the Toy Industry Awards and has also received product awards in the categories of Gaming Toy (Minecraft), Interactive Toy (Little Live Pets), and joint winner in the “Craze of the Year” for the Cra-Z-loom bracelet maker from the Shimmer ‘n’ Sparkle collection. Additionally the group was once again named supplier of the year by both Argos and Tesco.
As can be seen, the share buy-back programme has continued through the first half of the year with a total of 2.3 million shares at a value of £6.1M being purchased. This is a material amount given the number of shares in circulation and the group has the authority to buy back some 4.6 million more shares, although since the end of the half, no more have been purchased.
Richard King, the executive Chairman and joint founder has recently turned 70 and is looking to retire in the near future. Therefore he has decided that an orderly sale of the majority of his remaining shareholding should be undertaken over the next two years. As Mr. King owns over two million shares, this will be a substantial amount but understandable in my view.
Current trading apparently remains very encouraging. The group has had a good reception to their product portfolio from retailers following customer reaction at various trade expos and therefore they expect this season’s ranges to deliver in term of demand and sales across both the UK and international markets. The board are confident that the company can deliver another year of solid progress this year (I should think so after these half year results) and achieve current market expectations for 2015.
After a 51% increase in the interim dividend, at the current share price, the shares yield 2% which is expected to remain the same for the full year on Charles Stanley’s estimates. At the end of the half year, the group had a net cash position of £4.3M compared to a net debt position of £4.6M at the same point of last year.
On the 4th June it was announced that executive Chairman Richard King, following the announcement at the interim results stage, has conducted a placing of a total of 1,531,924 shares. Of that total, 1,009,308 were placed at 414.75p per share with the remaining 522,616 being placed at 415p per share. As previously mentioned, he was a substantial shareholder and this sale represents some 7.36% of the total equity in the company. Following the transaction, Mr. King retains an interest of 536,286 shares equivalent to 2.58% of the total share capital.
Overall then, this is an excellent set of half year results, although I do think the figures are slightly flattered by certain items. Profits are up but much of this is due to the adjustment for the fair value of the forex hedge (I really think this should be listed separately on the income statement) with underlying profit showing a more modest growth. Net assets are up as the group did a good job of converting working capital to cash which brings me to the cash flow statement. The group is very cash generative with oodles of free cash but again this has been flattered by very tight controls on working capital with a large increase in payables and a large fall in receivables, which is great but I wonder if this is really giving a real reflection of average cash levels through the year.
Operationally, the group has a lot of interesting brands and is winning some good awards which is good to see and over the period they have really purchased a lot of their own shares to give a lift to the share price, though perhaps reducing liquidity. Trading is currently in line with expectations, the company is currently in a net cash position and the forward P/E is just 11.1 on Charles Stanley’s 2015 estimates which seems good value to me, although growth for 2016 is likely to be lower. The 2% dividend is nice to have too. In all, this looks a great investment but as usual I am tempering my enthusiasm with the knowledge that the stellar growth that occurred this year is unlikely to continue and the group will have to maintain its momentum after Richard King retires as executive Chairman.
Well, that chart looks excellent – I think I might take a nibble.
On the 6th August the group announced that Chairman Richard King sold 200,000 shares at a value of just over £1M to leave him 336,286 shares. Also, executive director Josehp Kissane exercised 47,000 share options at price of 63p per share and promptly sold them. He retains 500,000 shares in the company.
On the 8th September the group released a rather short update where they said trading for the full year had been satisfactory and they expect to deliver a year-end result in line with market expectations. They also announced the appointment of Allenby Capital as joint broker and stated that they would look to continue their share buyback programme. I have to say I am not sure how to take this update, the fact that trading is only “satisfactory” is not great to hear and the appointment of a joint broker could be acquisition related but I am not sure. I am just a little more nervous about being invested here than I was before the announcement.
On the 17th September it was announced that finance director Kiran Shah sold 1,830,000 shares netting an incredible £9.3M. In addition, Marketing Director Jon Diver exercised options over 750,000 shares at an exercise price of 187p per share and sold 600,000 of these shares netting £1.7M. Kiran still owns over 10% of the total share capital and Jon owns over 6% so they still have a big interest. These sales were apparently in response to institutional demand and we do see GLG Partners buying 1.2M shares but I still don’t like to see such large share sales from directors of a company.