Small Cap Value Report (Fri 13 Sep 2019) - CCT, JDW, GAN, TM17

Friday, Sep 13 2019 by

Good afternoon, Graham here.

Paul and I appear to have got our wires crossed about who was doing today's report.

I'm going to do a late version of the report now, with the help of Jack Brumby.

Sorry for the lack of communication and lateness! We are on it now.

Today's report covers:

By Jack:

Character (LON:CCT)

  • Share price: 355p (-4%)
  • No. of shares: 21.4 million
  • Market cap: £76 million

Trading update

Profit warning.

‘Through a combination of these factors, the profit before tax for the Group for the year ended 31 August 2019 is likely to be in the range of £11.0m - £11.5m., slightly under the lower end of current market expectations.’

This toy company is one of the more popular stocks on the site - and recently, as many of you know, the share price has unravelled as a result of Hasbro bidding for Peppa Pig IP owner Entertainment One. It’s been quite a dramatic decline.


That’s a drop of about 38% over the past couple of months. Alas, when it rains it pours.

The company says:

The second half of the financial year just ended has seen several factors negatively impacting our business. The most significant factor has been the failure of the retail market in Scandinavia to fully absorb the sales vacuum caused by the liquidation in January this year of Top Toy, OVG-Proxy ApS's ("Proxy") largest customer until its demise.’

Add to this Sterling weakness (with the $/£ proving particularly painful for the group) and the fact that Character’s recent purchase of Proxy needs a bit more TLC than was originally anticipated… It’s clear that conditions are tricky for management right now. When it rains it pours.

As for Peppa Pig, Character says:

To date, there has been no dialogue between the Company and Hasbro as to its future intentions for Peppa Pig and, although it is unlikely that a definitive position in that regard will be known for some time, discussions have taken place with eOne and it has been agreed that the Group's current Peppa Pig licence (due to expire on 31…

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All my own views. I am not regulated by the FSA. No advice.

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J D Wetherspoon plc owns and operates pubs throughout the United Kingdom and Ireland. The Company aims to provide customers with food and drinks. The Company operates a trading estate of approximately 895 pubs. The Company operates over 40 hotels and approximately 900 rooms. The Company's hotels include George Hotel, the Shrewsbury Hotel and the Unicorn, Ripon. The Unicorn, Ripon consists of over 32 bedrooms in North Yorkshire. Its hotel rooms provide unlimited free wireless fidelity (Wi-Fi) as standard and its staff member provide assistance around the clock. The Company's hotels have adjoining pubs, serving breakfast menu and Wetherspoon dishes, and club nights. The Company offers a range of food, such as burgers, desserts, steaks, and salads and pastas. Its food menu includes Breakfast Club, Deli Deals, Small Plates, Sharers, Burritos, Pub Classics, Fresh From The Grill, Chicken and Ribs, Burgers and Dogs, Sides, Mexican Monday, Steak Club, Chicken Club, Curry Club and Fish Friday. more »

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GAN plc, formerly GameAccount Network plc, is a provider of enterprise online gaming software, operational support services and online game content development services to the casino industry. The Company's segments are business to business (B2B) and business to consumer (B2C). The Company is engaged in the provision and development of real money gaming software and the supply of Internet gaming systems to the online industry, and the provision and development of simulated gaming software and underlying systems to casino operators in the United States and other international markets. It offers GameSTACK Internet Gaming System, which is licensed to online and land-based gaming operators. The Company also licenses gaming content to a range of United Kingdom, Spanish and Italian gaming operators. In New York, the Company offers a Simulated Gaming Website, It offers a virtual reality (VR) simulated gaming application, containing Class III slot machines. more »

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The Character Group plc is a toy company. The Company is engaged in the design, development and international distribution of toys, games and gifts. Its geographical segments include other EU, UK and Far East. It designs and manufactures toys based on television, film and digital characters, and distributes these products in the United Kingdom and overseas. It also distributes finished products in the United Kingdom developed by overseas-based toy producers. Its diverse product range includes products for pre-school, boys, activity and girls. The Company's brands include Peppa Pig, Little Live Pets, Teletubbies, Minecraft, Scooby Doo, Mashems, Fireman Sam and Ben & Holly. Its customer list includes the United Kingdom toy retailers, the United Kingdom independent toy stores and a selection of overseas distributors. It operates approximately two distribution warehouses located near Oldham, Greater Manchester. It primarily distributes products sourced from overseas third parties. more »

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  Is LON:JDW fundamentally strong or weak? Find out More »

62 Comments on this Article show/hide all

Roger Lawson Fri 4:28pm 43 of 62

In reply to post #512906

Appalling behaviour or the remaining director at EDGE - reappointing directors who had been removed at the AGM vote. That last time I saw this happen was at Victoria - but that soon got overturned and all of them removed! That should happen here if shareholders had any sense.

Website: Roliscon
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Roger Lawson Fri 4:32pm 44 of 62

In reply to post #512881

Not trusting the accounts is very much what I just said in my new book entitled "Business Perspective Investing" (subtitled "Why financial numbers are not important when picking shares"). Even cash flow figures can be misleading if there is downright fraud, which is quite common - Patisserie is just one example.

You need to look at many other facets of a company not just the financial numbers.

Website: Roliscon
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Graham Neary Fri 5:01pm 45 of 62

In reply to post #512976

re: 888

Hi EI, I covered that in detail in the Midcap Report (you can get to it by clicking on my face above!)

Market cap nearly £600 million so it's better suited for midcap reporting.



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Jeffvshep Fri 5:13pm 46 of 62

In reply to post #512901

When a market commentator says the £ rose/fell for X reason they don't really know what they are talking about as they can't read minds. If you bought £ today, only you would know why wouldn't you.

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ACounsell Fri 5:14pm 47 of 62

Hi Graham,

I posted a comment about Xaar (LON:XAR) yesterday regarding Xaar 3D shareholding sale. As you have commented on Xaar (LON:XAR) in recent past wondered what you think about the proposed deal?

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davidjhill Fri 5:15pm 48 of 62

In reply to post #512991

hi John

Yep - small. Character (LON:CCT) opened at 250p/280p bid offer and actually only circa 3000 shares were traded before they were back above 300p, so probably wouldn't have got much, if any. Interesting to see they stabilised just a few pence down by close of play.

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bryans1311 Fri 5:52pm 49 of 62

In reply to post #512921

Out of an annual UK government budget of circa £800bn, £20-£40bn impact is not exactly catastrophic. I’m sure most on here have seen their portfolios move more than (%) this in a day Besides, I can think of where 30 odd billion of that can come from...

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bryans1311 Fri 5:54pm 50 of 62

In reply to post #513001

Book plug *cough cough*

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JohnEustace Fri 6:11pm 51 of 62

In reply to post #512981

Character says in their latest report that

"Our current portfolio is derived from our own-developed, inhouse ranges, including those that we produce ‘under licence’, and those of third-party manufacturers, which we distribute in our territories on an exclusive basis"

So while they don't own the Peppa Pig character the toys are developed by them and I assume that means they have some IP in the designs. The same applies to the Stretch figures they sell with Hasbro branding.

So although they aren't vertically integrated like GAW they are more than a simple distributor. I don't think Hasbro can just say thank you in two years and start making all the current Peppa Pig toys themselves without reaching an agreement with CCT.

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kev231072 Fri 6:58pm 52 of 62

In reply to post #513011

Hey Graham, where do I find the 888 write up?

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Jack Brumby Fri 7:05pm 53 of 62

In reply to post #513051

I see, thanks for the quote and comment John. I wonder how much value you might ascribe to CCT's inhouse design and development function. I couldn't find any mention of IP in the accounts - happy to stand corrected - but I would've thought management would explicitly reference this aspect of their business? I see intangible assets of £803k for product development in the FY18 accounts. This figure could be understated.

To be clear, I can see a lot of good plus points re. CCT - the returns on capital, the cash generation and distribution (divis & buybacks), the owner-founder management with substantial shareholdings, and (esp. now) the valuation. I believe forecast divi yield is above f'cast PE ratio. But I also think short-term risks have increased. For those willing to accept the risk, it strikes me as a profitable, well-run company that could be a good medium-term investment.

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Graham Neary Fri 7:23pm 54 of 62

In reply to post #513021

I haven't looked at that news from Xaar (LON:XAR) yet ACounsell, sorry. Maybe on Monday! G

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Merlotman Fri 8:01pm 55 of 62

In reply to post #513061


Grahams mid cap report can be found at

Some other familiar writers also contribute...

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Ted Johnson Fri 8:38pm 56 of 62

In reply to post #512851

Can't access presentation video for Property Franchise group. Comes back with error code 404 oops! Anything you can advise. I have tried via both their site and piworld.

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Laughton Fri 8:53pm 57 of 62

In reply to post #513091

Ted, Have you tried here -

You might need to scroll down the page a little then click on the "play" arrow in the black box.

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Edward John Canham Sat 9:14am 58 of 62

In reply to post #512976


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kev231072 Sat 9:28am 59 of 62

In reply to post #513076

thank you 

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john652 Sun 8:23am 60 of 62

In reply to post #513026

Hi Davidjhill,

Thanks for that info, where do you find that information, ie opening prices & traded volume?

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davidjhill Sun 2:52pm 61 of 62

In reply to post #513066

Hi Jack

Yes, my answer is similar to Johns post above.

They develop some of their own toy products in-house, some of which relate to licences and others that are their own creation. If a licence expires the company taking back the licence won't get the toy designs, unless they agree to pay something for that IP.
This is also why licences tend to be for a long window. We are very focused on Peppa Pig as it is pertinent to the Character (LON:CCT) will have had it for 17 years! Successful designers and distributors have sticky clients. The two things combined provide what I would call a mini-moat!

Since Character (LON:CCT) only tends to trade at a maximum of 10-12* cash adjusted earnings licences that last 17 years plus are fine. If they were perpetual the share price would command higher multiples.
You obviously need to be able to replace and diversify successfully in case an event such as a takeover happens and that's what management seem very good at.

Then you have the fact that product design coupled with very strong distribution is far from easy to replace. New entrants find it really hard to break into this market. Why would brand owners, or toy designers give exclusivity to un-tested new entrants when Character (LON:CCT) have proven so adept at understanding and tapping the market and creating value consistently over time? People seem to be under the impression that this is an easy market to break into and it really isn't. This acts as another mini-moat. It helps of course that Character (LON:CCT) is so good it recently won supplier of the year at the industry annual awards.

My point previously was really that there's been an over-reaction partly created by uncertainty and partly by a lack of understanding around the nature of the business model. At the current price the market has more than discounted in a complete removal of the Peppa licence and attributed nothing back for the next 2 years which are secure at the very least.
It has assumed, despite good historic performance suggesting the contrary, that management will not replace any lost revenues with new licences and products. The current multiples suggest that the market thinks the average licence duration is 5 years, when really it is 2-4 times that for the good products.

Hence for me risk/reward now looks pretty good. You'll get all the benefit of the next two years Peppa revenues and any licence extension (in whatever form) for free. If the

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mammyoko Mon 9:18am 62 of 62

Nice work Graham and Jack

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 Are LON:JDW's fundamentals sound as an investment? Find out More »

About Graham Neary

Graham Neary

Full-time investor and independent analyst. Editor at Cube.Investments, small-cap writer at Stockopedia. Previously a fixed income analyst in the City and institutional fund manager. I'm a CFA charterholder and have the Investment Management Certificate and STA Diploma in Technical Analysis for good measure. When I'm not talking about finance, I enjoy recreational poker, chess and Mandarin Chinese. more »


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