Character Group has now released their final results for the year ended 2017.
Revenues declined when compared to last year due to a £5.7M reduction in ROW revenue (UK revenue was flat). Cost of inventories fell by £5.6M but there was a £1.7M negative movement in financial instrument costs which meant that the gross profit was down £1.9M. Selling and distribution costs fell by £181K, staff costs decreased by £341K and other admin expenses declined by £369K to give an operating profit £915K lower. Finance costs were broadly flat and tax charges fell by £157K to give a profit for the year of £10.1M, a decline of £737K year on year.
When compared to the end point of last year, total assets declined by £975K driven by a £1.3M fall in inventories, a £509K decrease in the value of forward forex contracts, a £456K decrease in prepayments and a £419K decline in product development, partially offset by a £1.2M growth in trade receivables. Total liabilities also declined during the period as a £1.3M growth in income tax payables and a £679K increase in forward forex contract liabilities were more than offset by a £3.7M reduction in import loans, a £1.9M fall in trade payables, a £1.1M decrease in accruals and deferred income and a £761K fall in finance advances. The end result was a net tangible asset level of £26.1M, a growth of £4.3M year on year.
Before movements in working capital, cash profits increased by £848K to £16.2M. There was a cash outflow from working capital but this was lower than last year and after tax payments fell by £1.3M the net cash from operations was £12.8M, a growth of £4.6M year on year. The group spent £1.5M on intangible assets and £249K on property, plant and equipment to give a free cash flow of £11M. Of this, £2.6M was spent on their own shares and £3.6M on dividends to leave a cash flow of £4.8M and a cash level of £11.5M at the year-end.
Conditions in the market have been challenging. The group’s international sales have been adversely affected by Toys R Us’s Chapter 11 bankruptcy protection in the US and Canada in September which has had a knock on effect in every market. It has also been announced that the UK arm is also likely to undergo a restructure.
The group has achieved top rankings in the Dream Toys Top 12 list for Stretch Armstrong and Laser X. The Stretch range has performed well and remains one of their top brands in the UK and Internationally. The master toy licenses for Peppa Pig and Teletubbies was renewed for a further three year and the group was appointed master toy distributor in the UK and Ireland for Pokemon ahead of a planned Summer 2018 launch.
Going forward, the group’s performance for the first half of 2018 will reflect a temporary slowdown but the directors believe the business will return to its previous growth pattern in the second half. In addition, the pipeline of new product releases planned for 2018 is predicted to drive a return to a stronger trading performance in 2019.
At the current share price the shares are trading on a PE ratio of 9.7 which increases to 11.6 on next year’s consensus forecast. After a 26% increase in the dividend the shares are yielding 4.3% which increases to 5.2% on next year’s forecast. At the year-end the group had a net cash position of £11.5M compared to £6.9M at the end of last year.
Overall then this has been a bit of a mixed year for the group. Profits declined but net assets increased and the operating cash flow improved with plenty free cash being generated. The market is challenging at the moment, related to Toys R Us going into bankruptcy which is going to lead to a slow-down in H1 and the important Christmas period. Still, the forward PE is forecast to be 11.6 next year with a yield of 5.2% which is not too bad. The group is also sitting on net cash so I tend to view this as a temporary blip. Having said that, if Christmas trading disappoints too much these shares could tumble further so I have sold half my holding.
On the 19th January the group released a trading update covering the first four months of the year, including the Christmas retail sales, which were in line with expectations. Whilst international sales were adversely impacted by many factors, not least of which was the global refinancing of Toys’R’Us, domestic sales continued to perform well, showing growth when compared against the comparable period last year.
The leading brands continued to trade well and the core ranges will be strengthened as the group adds product extensions to them. They continue to add new ranges such as the new line up of Pokemon products, which will be launched at retail this summer. The directors are confident that the performance of their core ranges and these new introductions will positively impact 2018 as a whole. The group have emerged from the Christmas period with virtually no excess stocks to deal with.
While the performance for the first half of the year will reflect the overall lower trading compared to last year, the board remains confident that absent any major external factors, the group will return to its previous growth pattern during the second half of the year. The ship seems to have steadied and I am holding on to my remaining shares for now.