This is one that has come through on a number of screens due to its excellent recent performance, particularly in revenue growth. The profits are backed by strong cash flows and the company appears to be trading at very modest multiples, despite having roughly doubled in value over the past 7 or 8 months.
Screen Summary
- On a forward PER of 11.4x, PCF of 5.9x and PS of 0.89, it would appear that the firm is being undervalued with regards to its earnings power, assuming current performance persists.
- On the other hand, at 8x book value, the business does not appear cheap.
- However, given the capital light nature of the business it seems reasonable that the earnings engine could justify a valuation beyond that implied by its net assets.
Overall, the first impression is good and I believe that this warrants a closer look.
Company Background
The company designs, develops and distributes toys and games for children across the world. Set up in 1991 by Richard King (currently the Chairman of the board), they have come a long way and are now one of the largest distributors in the UK market, with an impressive portfolio of products that looks set to perform over the coming months and years. The recent addition of some big brands such as Peppa Pig, Teletubbies (Character are now the global 'Master Toy Partner' for the famous BBC series), Dr Who and Minecraft, have had positive impacts on revenues and the 2015 interim trading report suggests that the earnings momentum these new product lines have brought is not set to end just yet.
As mentioned above, the business is extremely capital light due to their strategy of outsourcing all production and I think that this will really allow for operational flexibility as demand ebbs and flows. Such a strategy is vital in a market like this one, where future profits lie in the fickle hands of children, and where opportunism may be key in finding the next success story. So far so good - the valuation appears reasonable, the strategy appears to be working and the company is run by experienced professionals. Economically, then, does the scenario of sustained or improved profitability make sense going forward?
Operating Performance
From the most recent trading statement (dated the 28/02/2015), we can…
