Character Share Blog – Final Results Year Ended 2019

Character has now released its final results for the year ended 2019.

Revenues increased when compared to last year as a £1.2M decline in UK revenue was more than offset by a £15.4M growth in ROW revenue.  Cost of inventories was up £13.5M but other cost of sales declined slightly, including a £1.2M positive swing to inventories write down credits, to give a gross profit £5.2M higher.  Selling and distribution costs grew by £1.8M, staff costs were up £2.6M and other admin expenses also rose.  There was a £299K decline in other operating income and there was a £3.1M impairment of goodwill, although this was somewhat offset by £1.5M of contingent consideration that was no longer payable which meant the operating profit fell by £1.7M.  Finance costs and taxation increased somewhat to give a profit for the year of £7.9M, a decline of £1.7M year on year.

When compared to the end point of last year, total assets increased by £9.7M driven by a £9.4M growth in receivables and a £5.5M increase in inventories, partially offset by a £5.6M decline in cash.  Total liabilities also increased due to a £4.1M growth in payables and a £3.4M increase in borrowings.  The end result was a net tangible asset level of £33.2M, a growth of £2.3M year on year.

Before movements in working capital, cash profits increased by £274K to £13.9M.  There was a cash outflow from working capital and interest payments increased by £426K, although tax payments reduced to give a net cash from operations of £7.9M, a decline of £2.8M year on year.  This did not cover he £8.9M spent on the acquisition and they also spent £1.7M on intangible assets and £449K on capex to give a cash outflow of £3.1M before financing.  They then paid out £5.3M on dividends and £1.3M on their own shares which gave a cash outflow of £9.2M for the year and a cash level of £6.5M at the year-end.

This was a challenging year from the group.  The Scandinavian toy market failed to recover fully from the demise of Top Toy, the UK toy market continued to decline and the group suffered from the weakness in Sterling.  The group’s market share in the UK did not materially change in the year.

During the year the operating loss sustained by Proxy was £750K.  The Proxy team is focused on reducing the current inventories of slower moving lines.  A full review of the business model is underway and it is expected that, in addition to tighter group controls over purchases and a substantial reduction of the product lines already agreed, this will lead to cost cutting measures being implemented.  Whilst the challenging market conditions in Scandinavia are continuing, the board is hopeful of a significant improvement in Proxy’s performance in the current year. 

The group’s collaboration with Moose Toys has led to the production of a new range of compound-filled, collectable characters under the Goo Jit Zu brand, which was launched in the summer.  The brand has already gained acclaim in the industry, receiving a nomination in the final selections for the UK’s Top Toy award and becoming a finalist in the US action figure Toy of the Year for 2020.  The line has also been well received by their customers and distributors but did not feature significantly in the sales in the year.  They anticipate achieving significant sales in over 30 territories by the end of the current year and revenue forecasts look strong.  Further developments for the brand include a series of Marvel collectable characters. For which the group has secured a European and Middle East license from Disney.

In Spring 2020 they will be launching two new in house brands which have received good reactions from their early presentations.  As well as their in-house brands, the portfolio includes lines produced by overseas companies which they distribute and new ones will be added in 2020.

Following the announcement of the proposed takeover of Entertainment One by Hasbro, it is good to see that the current Peppa Pig license was extended until June 2021.  They also signed a new licence with Entertainment One to produce a range of wooden Peppa Pig toys and products.  This deal which includes Europe and Australia will run through to December 2022.  The initial reaction to the concepts and designs have been positive.  The line is likely to be launched in June 2020.

The international sales of their lines, particularly Goo Ji Zu and Peppa Pig have been encouraging and coupled with the introduction of new brands such as the Peppa Pig wooden range, the board anticipate significant growth in international sales this year. 

In October 2018 the group acquired 55% of Proxy, a Scandinavian toy distributor based in Denmark.  The consideration paid amounts to £11.2M and the acquisition generated goodwill of £3.1M.  In view of the losses sustained by the business, however, and in light of forecasts going forward, the board is of the view that the contingent consideration of £1.5M will not be paid and has written off the goodwill.

Going forward, the challenging trading in prospect for Christmas will affect the first half of the year but prospects for the second half look positive.  The new ranges will feature increasingly in sales in the coming year, both domestically and abroad.  Overall the board are confident they will achieve market expectations for the current year. 

At the current share price the shares are trading on a PE ratio of 8.8 which increases to 9.3 on next year’s consensus forecast.  After an 8.3% increase in the dividend the shares are yielding 4.6% which remains flat on next year’s forecast.  At the year-end the group had a net cash position of £6.5M compared to £15.6M at the end of last year. 

Overall then this has been a rather tricky year for the group.  Profits were down, as was the operating cash flow which didn’t cover the acquisition.  This was mostly due to working capital movements, however, and the net asset level did rise.  There are problems in both the Scandinavian market and the UK one.  The Proxy acquisition seems rather ill-judged to me and there is also the potential problem of Peppa Pig brand owner Entertainment One being taken over by Hasbro, who you would have thought would like to eventually take production in-house.  Some of the upcoming releases seem interesting though and trading is likely to pick up in the second half.  Unfortunately this means the all-important Christmas trading could be poor.  The forward PE of 9.3 and yield of 4.6% looks decent value but I think I would rather find out how Christmas trading went before committing. 

On the 17th January the group released a trading update.  The Christmas period was very challenging with the total market in the UK contracting for the second year.  These conditions will impact the results for the first half.  Sales of core products were lower than last year.  Despite the first half results being below last year, the board believe that they will deliver a strong second half. This confidence has been boosted by customer reactions to recent products.

Despite the expected strong second half, the weakened Christmas performance has led the board to believe that their pre-tax profit for the year will be around £10M which is below market expectations. 

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