Character Group looks the part

Character Group is a top toys business trading on just ten times current year earnings and boasting a big 81p a share cash balance.

It is at this time of year that parents, grandparents and all other relations go Christmas present shopping for the children in their lives.

And that is good news for The Character Group (LON:CCT), the designers, developers and international distributors of toys, games and giftware.

It is the largest UK-based independent toy company. It designs and manufactures toys and games, many of which are produced under licence and based on popular television, film and digital characters. It distributes all of those products both in the UK and in many overseas territories. 

The group also partners on an exclusive basis with other overseas-based toy producers to market and distribute their products in the UK.

Its diverse product ranges focus on a number of key areas within the toy sector, which includes Pre-School (where it is the market leader), Boys, Activity and Girls.

Every year this company manages somehow to identify the ‘hit’ toys that children will go for in the following Christmas. Those goods are selected early in the same year and then presented to the major retail buyers several months ahead of the festive period.

And this year, despite Covid-19 and all of its unexpected hassles, the group has scored incredibly well in the prestigious ‘best toys of the year’ wish list.

That list of twelve ‘Dream Toys’, announced by the Toy Retailers Association in late October, included three of Character’s hero toys in its list.

No doubt you will all know just how popular those toys are – Peppa Pig’s Shopping Centre Playset, the Laser Battle Hunters remote control vehicles, and finally the Pokemon Carry Case Playset.

In the most sought-after toys listings, the group had another five of its toys selected, such as ‘Squeakee the Balloon Dog’, the ‘Gotta’ Go Flamingo’, the ‘Heroes of Goo Jit Zu’ figures, the ‘PenSilly’ family game and also the fun creative line ‘Stuff-a-loons’.

The success of these selections follows months of creating product awareness for its toy lines.

Last Thursday the group declared its annual results for the year to end-August. They showed a resilient performance in the face of massive Covid-19 retail hazards hitting its marketplace.

Sales in the year only fell 12.5% to £105m. However, its adjusted pre-tax profits were more than halved, coming in at £5.0m against £11.1m previously.

Earnings per share fell from 43.2p to just 18.1p, while its dividend was slashed to 5p compared to 26p in 2019.

Even though those figures may look daunting, as I have said about so many other corporate results this year, it is not about what went on during the virus but just how well the company recovers its stance going forward.

Analyst Ian Jermin at Allenby Capital, its corporate brokers, estimates that the group will bounce back convincingly in this current trading year. He is going for group sales of £125m and £10.5m pre-tax profits, worth 37.6p per share in earnings, easily covering a 9p dividend.

There are 23,608,781 shares in issue, of which 2,228,720 shares are held in Treasury. 

Based upon the non-Treasury holdings, the group’s major holders include Kiran Shah (10.13%), Henry Spain Investment Services (7.27%), Close Brothers Asset Management (7.05%), Forager Capital Management (7.00%), Jonathan Diver (6.59%), Sweet Briar Investment (5.96%) and Ruffer LLP (5.11%).

Apart from the joint managing directors, Kiran Shah and Jonathan Diver, the other directors control an additional 6.15% of the group’s equity.

I remember when Richard King and Kiran Shah brought their Toy Options business to the market in the late 1990s. They always had the eye for what could get a child’s attention and then engender desire to have such toys. 

Shah was/is a very shrewd accountant and his ability shows through in the almost tripled cash balance at the year-end – some £19.1m against £6.5m previously. And that was during the peak of the crisis.

With its shares at 395p, the group is valued at just £93m, including its Treasury shareholding. 

Looking at its recovery potential in 2021, I consider that the shares could well trade above the 500p level within the next year.