Character Share Discussion Threads

[orange1] 28/1/2020 10:21

profdoc

That´s great. Thanks very much for sharing your piece.

[profdoc] 28/1/2020 09:29

Orange1, Last week I posted the following to my Newsletter subscribers (Deepvalueshares on ADVFN)- it's a bit long but you might pick up something usefu:

Character Group’s AGM:
On Friday I travelled to London to attend Character Group’s (LSE:CCT) AGM, and to discuss some key issues with directors after the formal meeting. They were very generous with their time. Jon Diver, Joint MD, was willing to chat for half an hour after the meeting; Kiran Shah, FD, and Michael Hyde, MD for the Far East, each spent quarter of an hour with me. I’m very grateful for their welcoming attitude to a lowly private investor and for being so keen on informing shareholders.
Toy market decline
Before the 11am meeting started Mr Market had pushed the share down 15%. This was in response to a 7am trading update which described the Christmas period as extremely challenging with the UK toy market contracting for the second successive year.
A little more on that: in the meeting the directors said they estimated toy sales to be around 15% down over two years and a further 7-9% might occur. Worldwide, the toy market is in decline, but not as much as in the UK.
They were asked why the volume of toys sold falls like this. Answer: there are trends in fashions, crazes come and go. In the past Character has ridden some good trends, e.g. slime. This year there was no craze to boost sales. Ups and downs are all part of the game.
Optimism for the months ahead
The trading update also stated, “We enter the 2020 calendar year with a very strong product portfolio and, although the first half results will be below last year, we anticipate that the Group will deliver one of our strongest second half performances to date.”
The foundation for this belief is “the reactions from our customers to recent product previews and presentations”. In this context we need to remember that the company was founded by four people, and those four are still running it.
They are used to talking with customers. Indeed, Jon Dover and other directors will be manning stands at the London Toy Fair this week. The enthusiasm with which Jon described the new products (those already announced and those which are still under wraps) is a sight to behold. He really loves this business and the way in which it is constantly renewed by exciting new toys (one is a giraffe which poos!).
Putting some numbers on it
The update said that despite the anticipated strong finish to the current year (yearend 31 August) Christmas was so poor that profit before tax is expected to be circa £10m (it was £11.1m in 2019). So around £8m after tax for 2020. This is substantially below the expectations of analysts, some of whom attended the meeting and made their displeasure felt (there was about 35 people in the room).
At £8m of earnings, with the market capitalisation at £68m the shares stand on a forward PE of 8.5.
Using the average earnings per share (35.1p) over ten years the cyclically adjusted price earnings ratio is 320p/35.1p = 9.1. The average for the UK market is 15-16.
Dividend yield, assuming no diminution of the dividend in the current year is 26p/320p = 8.1.
The company throws off so much cash and has such a strong balance sheet that the board have the task of deciding just how much to hand out by way of dividends or through share buy backs – this is true even in a year when profits fall to a “mere” £8m. In 2019 the decision was £5.3m for dividends and £1.27m for buybacks.
I started my conversation with Kiran Shah by congratulating him on achieving rates of return on capital employed (averaged over a number of years) of 87% per year. To my great surprise he responded that he was not content with that number. He aims for more than 100%, as CCT has achieved in years gone by.
They simply do not need capital to invest in factories, plant etc., because the heavy stuff is done by Chinese suppliers.
Are you paid too much?
An institutional investor asked the head of the remuneration committee, David Harris, if the director pay is too loosely linked to performance? After all, profit fell last year and yet board pay was £3.5m compared with £3.6m in 2018.
Answer: In some years directors have forgone salary completely (indicating they share the pain in bad years). Also, base salary is not high relative to the market value of the individuals. They could take up posts in other companies in the sector at high pay (two directors are on a base salary of £245,916, but with bonuses total remuneration is £1m for Jon Diver and £0.8m for Kiran Shah).
Diver is entitled to 4% of pre-tax profit, Shah to 2% and Joseph Kissane, another MD and co-founder 1% as bonuses. Half of bonuses are in cash and half in shares.
David Harris concluded: “without them we would have a significantly inferior company”.
I accept that for a £68m MCap company director remuneration around the million mark is high. But I also accept that these three, together with chairman Richard King, took an enormous risk with their careers in coming out of other toy companies in 1991 to set up Character Group, and so I have little difficulty accepting that part of their pay looks like that obtained by successful entrepreneurs.
Is the board distorted?
The institutional investor complained about the lack of independence of Board members, with five executives and three non-executives (worse one of the NEDs is a co-founder and another has been on the board beyond the corporate governance guideline limits).
Response from Chairman Richard King: Yes, there is a limited amount of independence, but we are a small company which achieved good results, built a good team with a good reputation and relationships with suppliers.
Then Richard attacked the policy adopted elsewhere of recruiting so-called independent directors as mere box-ticking. He said despite the Board having worked together for many years there is a diversity of views. When we have a (rare) contentious vote, we argue it through.
Personally, I’d rather have a group of people who know the business inside out than a scattering of “independent” names on the board. The current board are all very knowledgeable about the company, its strategy and its people.
There is a danger of group-think, or dominant-person stifling rational debate, but I’d rather face these risks than have most votes in non-active board members hands.
How confident are you that new product lines will increase profits sufficiently to offset the Entertainment One losses over the next three years?
Answer from Jon Diver: the loss of Peppa Pig was “a kick in the balls, for sure”. But there are reasons for hope, not least the wooden Peppa Pig toys license agreed with Hasbro (until December 2022).
These toys are being launched at the London Toy Fair this week and have “great potential”. They meet the need for more environmentally friendly toys (than plastic ones). There are also international expansion possibilities.
Later I ask Jon if Hasbro might, in 2023, opt for in-house wooden toy production. Apparently, Hasbro are wedded to plastic. And besides they won’t touch a line that offers less than $10m annual turnover.
The company has ramped up development of own-brand toys where margins are fatter. Goo Jit Zu is in 30 countries now, with yet more international potential.
I asked if I was correct in thinking that the Peppa Pig ranges due to cease in June 2021 account for around 20% to 30% of Character’s profits.
Answer: Yes, around 25%. That gives a target for the directors to make up through new franchise deals and in-house toys. They seem bullish.
Can you please update us on the losses at PROXY in Scandinavia?
Answer: It’s been a challenging year. First, the largest Scandinavian toy retailer went bust. Then the second largest was offered the toy stock from the resultant shell. It bought the stock at a discount and proceeded to sell it through its stores at full price. This meant that it had little appetite to buy more stock from the likes of PROXY. However, the stock has now largely worked its way through and PROXY is anticipating more orders.
There is a big push to get PROXY firing on all cylinders: CCT’s managers are over there, helping PROXY get its systems right; overheads are being worked on. But it’s still a “work in progress”. At least, CCT will not be paying more to the previous owner than the £1.44m already paid. But even at this level the meeting was told “with hindsight we paid too much”.
Quite a lot of the inventories at PROXY have been cleared, much of it being sold in the UK.
PROXY is still seen as a Brexit safeguard.
Tom Spain, of Henry Spain, asked if the share buyback programme could be more aggressive (over the last few years the number of shares bought back roughly matched those given out as bonuses to staff)?
Response: the directors would like to buy more but are limited by stock market rules. They can’t buy more than 50% of the average volume of the open market trades on the LSE. Open market trades average around 22,000 per day, so the limits is about 11,000 per day.
Also, there are a lot of closed periods in a year when buybacks are prohibited.
Richard King said that share options are given to all staff except the founder directors. They are very proud that few employees leave the company. Over 80% have been with the firm for at least 20 years.
What is a sustainable level of dividends?
Answer from Shah, FD: we follow a progressive dividend policy, but we are levelling off on that while profits are stagnant. But we will resume it when we’re back on track.
What acquisitions would you consider now?
Answer: At the moment, we need to concentrate on handling what we’ve got.
How much forward visibility on sales do you have?
Jon Diver: most customers order only 2-3 weeks ahead.
I’ve bought some more shares.
This time I’ve bought for my Warren Buffett-style portfolio. The company has some strong businesses/franchises greatly assisted by reputation and relationships. The managers are both competent and trustworthy. Financial stability is assured. Return on capital employed is astonishing, and cash flow and profits consistently large even in the recent slowdown.
I’ll go into more detail later in the week.

[gfrae] 27/1/2020 10:20

Thanks,profdoc, though recently volume has bee quite high and they should not be in a close period.

[orange1] 27/1/2020 10:19

Profdoc

Are there any other interesting nuggets or information from the AGM which might be of interest?

[profdoc] 27/1/2020 09:29

gfae
The FD at the AGM said that they are keen on buying more, but there are two constraints: (a) only allowed to buy half the daily volume (b) there are closed periods

[orange1] 23/1/2020 09:06

Toy Fair 2020: Hidden Side, Geomag, and Heroes of Goo Jit Zu secure Editor’s Choice Awards

LEGO’s Hidden Side Haunted Fairground has been crowned the overall winner of the Editor’s Choice Awards at Toy Fair 2020, with the Geomag Green Range– 100 per cent Recycled Plastic placed in second position.

Character Options’ Heroes of Goo Jit Zu Marvel Super Heroes has secured third position in the annual awards organised by the British Toy and Hobby Association.

Voted on by media in attendance at Toy Fair this week at London’s Olympia, an event that has seen more than 260 exhibiting companies launch thousands of new toys, all aiming to make an impact in the sector during the year ahead.

“In such a competitive environment, placing in the top three of the Editor’s Choice Awards is a major achievement – and strong signaller of future success,” said Majen Immink, director of fairs and special events at the BTHA.

“These Awards are always an important and high-profile part of Toy Fair, and they’re made possible by the participation of all our friends in the media, who generously take time out of their busy schedules to vote.

“We extend our thanks to them, and our congratulations to LEGO, Geomag and Character Options.”

[gfrae] 21/1/2020 08:54

Real spread on RSP is 320 bid offered at 326.

[asusasus] 19/1/2020 09:50

£10 million profit and I could buy the entire company for £70 million? Looking to buy in here but the ridiculous spread is preventing me from doing so!

[undervaluedassets] 17/1/2020 09:37

awful update..

Contraction in christmas market for 2nd year..

and this before the loss of Peppa Pig 2 years hence? (bad news baked in one feels)..

And are we done with bad news from Scandinavia too?

Happy to admit I got this wrong. Out.

[scooper72] 17/1/2020 09:15

For me the question is are they slowly going bust or are they just going through a rough patch which will require them to come up with some good innovations and attractive plans that get share holders confidence back. Realise I haven't done enough research to know the answer to these questions. So will have to go away and do some work or find someone who has done it already before I either average down, hold or sell up

[mister md] 17/1/2020 08:40

lets see if the directors re-invest some of their hefty compensation into share purchases

[norbert colon] 17/1/2020 08:40

https://www.musicbusinessworldwide.com/hasbro-completes-3-8bn-acquisition-of-entertainment-one/Just for info....

[pireric] 17/1/2020 08:37

Pre tax profit Mister so tax at 20% and down to 8

And that's assuming the strong second half pulls through

[mister md] 17/1/2020 08:32

is this now on a p/e ratio of between 6-7 (profit expectations of 10m), with no long-term debt and a big dividend. Good entry point or still too risky ?

"we anticipate that the Group will deliver one of our strongest second half performances to date"

[deanowls] 17/1/2020 07:22

Terrible update. And still no news on peppa. If anyone is attending maybe they can ask.

[deanowls] 16/1/2020 14:19

I’d expect an update tomorrow.

[davidosh] 16/1/2020 12:56

NOTICE IS HEREBY GIVEN THAT the 2020 Annual General Meeting of The Character Group plc will be held at the offices
of Allenby Capital Limited, 5 St. Helen’s Place, London, EC3A 6AB on Friday 17 January 2020 at 11:00 a.m

[undervaluedassets] 16/1/2020 11:37

just xd today that is all..

[orange1] 16/1/2020 10:24

Thanks.

That Google is useless. Still nothing to be found there! But to be fair I can´t find it on the BBC site either.

[mip55] 16/1/2020 09:34

US toy firm Hasbro's $4bn (£3.3bn) acquisition of Peppa Pig owner Entertainment One has been given the go-ahead by the Competition and Markets Authority.BBC news

[orange1] 16/1/2020 09:30

ex-div of 13 p today.

Can´t see anything in the news which confirms the assertion made in the previous post.

[capercaillie] 16/1/2020 07:22

Hasbro receives clearance for Entertainment One deal