I'm sure some of you will be familiar with Character Group (L.CCT), which is an AIM listed designer, developer, and distributor of toys/games/giftware. The company enjoyed a stunning back end to 2014 and 2015 with the stock rallying from around 200p up all the way to 500p in mid-2015. The stock has consolidated well since then but has essentially flatlined for two years (give or take 10% either side) and currently sits at 495p or about 495p to 500p on the ask. The stock is valued now around £105m. I reckon this is one of those times where forward forecasts are light, where the multiple the stock trades on is absurdly low (especially ex-cash) and where only illiquidity and a lack of knowledge of the company is what leaves an attractive valuation anomaly.

To set the scene and hook some level of interest, Panmure art their FY17/18/19 forecasts as "conservatively framed." And on those, Character trades on a high single-digit PE, falling to approx 7.8x 2018e ex cash.

To paint the broad picture, this is a stock that has historically been at the mercy of product cycles - as a licensor of brands, and they do have territorial rights to the likes of Peppa Pig, Fireman Sam etc., but that has typically meant that they have ridden waves of successful products and dropped off if any particular range turned out to be a poor seller. Over the last 5 years or so, that cyclicality has changed, partly through scale, but also through expanding the product ranges - so whilst now the top 10 products are around 75% of revenues, the reality is that any drop off in one range does not have as much of a material impact on the company or trash profitability (bearing in mind each brand will have multiple product ranges itself). The ongoing success of certain franchises, such as Peppa Pig , also helps here. The fact that Character licences its content, reduces the risk that other toy companies face (in having to shell out large amounts on R&D for unproven concepts), and means that Character runs a highly cash generative, low CAPEX model.

The risk, on the other hand, is that Character ceases to win, or loses territorial licences, but that looks unlikely here. The company has a great track record of you development; it has been over two…

Finish reading with a 14 day trial

or Unlock with your email

Already have an account?
Login here