Character have now released their interim results for the year ending 2019.
Revenues increased by £8.3M when compared to the first half of last year and after cost of sales also increased, the gross profit grew by £3.8M. Selling and distribution costs were up £1.1M but there was a £3.5M fall in the forex loss and despite other admin costs increasing by £1.3M the operating profit was £4.9M higher. Finance costs increased by £202K and tax charges were up £873K to give a profit for the half year of £4.2M, a growth of £3.8M year on year.
When compared to the halfway point of last year, total assets increased by £18.8M driven by a £9.2M growth in cash, a £3.2M increase in inventories and a £3.1M increase in goodwill. Total liabilities also increased during the period as a £3.7M decline in derivative financial liabilities was more than offset by a £4.7M increase in payables, a £3.7M growth in borrowings and a £2M increase in deferred consideration. The end result was a net tangible asset level of £33M, a growth of £8.8M year on year.
Before movements in working capital, cash profits increased by £1.4M to £7.3M. There was a cash inflow from working capital and tax payments decreased by £1.5M to give a net cash from operations of £15.5M, a growth of £9.3M year on year. The group spent £7.3M on acquisitions, £675K on intangible assets and £286K on fixed assets to give a free cash flow of £7.3M. Of this, £939K was used to buy their own shares and £2.5M went on dividends to give a cash flow of £4.2M and a cash level of £19.8M at the period-end.
UK sales increased whilst the international sales, excluding the US remained steady. US sales continue to be challenging following the demise of Toys R Us but they are making good progress and should see an improvement in the second half.
During the period the pre-school Peppa Pig range has continued to grow well, both domestically and in their international markets. Old favourites like Fireman Sam and Ben and Holly have also performed with resilience. The Stretch range remains popular and is trading well both in the home market and internationally. They are also focused on capturing new licence opportunities for this range which they expect will lead to extensions to this enduring brand.
The group will be introducing further new products and range extensions to their portfolio in the coming months such as Peppa Pig wooden playhouse, theatre stage playset and vehicle, Stretch figures, Hair Dooz, Pokemon, OMG Pets, Laser X Original Double Pack, Ballerina Dreamer and What’s in a Box.
In October the group acquired a 55% stake in Proxy, a Danish toy distributor. The purchase comprises an initial consideration of £294K with a potential deferred consideration of £1.9M. The cash outflow for the acquisition includes £4.7M spent on invoice discounting and £2.3M of bank borrowings taken on and the acquisition has generated goodwill of £3.1M.
During the period Proxy contributed £357K to the operating profit. Sales at Proxy have been adversely affected by one of their major customers (Top Toy) going into administration in January but this is believed to be a short term set back as the Nordic markets formerly served by the business are quickly absorbing this retail capacity and other existing and new Proxy customers are seizing the available market share. Additional opportunities have also arisen for Proxy, given that its distribution footprint in this region matches that of Top Toy’s presence and they have captures the Nordic distribution rights for Little Live Pets and Laser X in succession to Top Toy.
The discussions for the refinancing of Proxy’s banking facilities have exposed an element of under-capitalisation in the business and this will be required to be addressed to ensure it can be viewed by the lending banks as an independent stand-alone entity. An additional loan or guarantee will need to be made by the group before replacement facilities can be agreed. Discussions are currently taking place with the management of Proxy who retain a 45% interest in the business and will need to be resolved by the end of August.
Group trading remains in line with management expectations and market consensus. Macroeconomic factors including currency volatility and the potential implications of Brexit will continue to influence market behaviour but overall trading remains encouraging.
At the period-end the group had a net cash position of £19.8M compared to £14.3M at the same point of last year. After an 18% increase in the interim dividend the shares are yielding 4.4% which increases to 4.8% on the full year consensus forecast. At the current share price the share are trading on a PE ratio of 12.8 which falls to 12 on the full year forecast.
Overall then this was a fairly strong period for the group. Profits were up, net assets increased and the operating cash flow improved with plenty of free cash being generated. The UK business is performing well but they are still struggling in the US, although this seems to be improving. The Proxy acquisition is contributing but this is not without its issues, and there is a risk here that it might become a drag on results. For now though the forward PE of 12 and yield of 4.8% looks like good value and I continue to hold.
On the 13th September the group released a trading update covering the full year. The second half of the year has seen several factors negatively impacting the business. The most significant has been the failure of the retail market in Scandinavia to fully absorb the sales vacuum caused by the liquidation of Top toy, Proxy’s largest customer. This loss of sales has resulted in losses being sustained by Proxy which has had a negative impact on the group as a whole. This setback is considered by the board to be attributable to the delayed recovery in retail in Scandinavia.
In addition, the continued uncertainty over Brexit has led to a weakening of Sterling in forex markets and this has been a factor for the group’s domestic business, given that a significant proportion of purchases are in USD. As a result this has put considerable pressure on margins and negatively impacted results for the second half of the year, and will likely continue to be a factor in the current year.
Through a combination of these factors, pre-tax profit in 2019 is likely to be between £11M and £11.5M, slightly under the lower end of current market expectations.
A newly incorporated, wholly owned Danish subsidiary has acquired all of Proxy’s inventory and forward purchasing commitments, thereby eliminating its overdraft. The group will provide inventory to Proxy as it received orders from customers. This will enable the group to more directly apply the resources and support of its sourcing and purchasing teams to Proxy’s sales efforts. This reconfiguration of financial facilities has led to a reduction in the group’s cash flow but the board believes that Proxy will return to profitable trading in the current year.
Also a potential issue is the announcement of Hasbro’s acquisition of Entertainment One, Pegga Pig’s brand owner. To date there has been no dialogue between the group and Hasbro as to its future intentions for Peppa but it has been agreed with Entertainment One that the group’s licence will be extended for another six months to June 2021. It seems likely, however, that in the long term it will be taken in house.
The group have launched Goo Jit Zu, a new in-house product line developed in collaboration with an overseas toy company and the reception in the market has been enthusiastic. They are currently focused on capturing new license opportunities for this range. There are also a number of other projects in development and negotiation at this time.
The board remains confident in the group’s continued profitable performance and are therefore retaining the dividend.