Character Group (CCT: 500p), the fourth largest distributor of toys in the UK, has reported a solid sales performance across the key Christmas trading period and importantly remains well on course to deliver results at least in line with analysts’ estimates for the 12 months to end August 2016. Revenues in the first five months of the financial year are 6 per cent higher year-on-year year. All of the company’s cornerstone brands – Peppa Pig, Minecraft, Fireman Sam, Teksta, Litle Live Pets and Scooby Doo – continue to perform well. These product lines are sold by Character on behalf of overseas owners under licensing agreements.
It’s worth noting that the recently introduced Teletubbies brand, as well as other brand introductions to be unveiled in the near future, should see Character’s sales accelerate towards the 10 per cent growth rate that analyst Myles McNulty at brokerage Allenby Capital forecasts for the current financial year. Teletubbies brand owner DHX Media commissioned a new series of 61 episodes and Character Group is the appointed 'Global toy partner'. The new Teletubbies product range went on sale in the third week of January at all major UK retailers, and early indications are that it has been well received.
Allenby maintains forecasts that the company will increase revenues from £99m to £110m, and grow cash profits by around 7 per cent to £15m in the 12 months to end August 2016. On this basis, expect Character to deliver pre-tax profits of £12.6m and EPS of 49p which in turn will underpin a 10 per cent hike in the payout to 12.25p. The likely payout could be even higher given that Character’s cash generation remains robust: having turned a net debt position of £4.5m in August 2014 into net funds of £4.5m a year later, analysts’ forecasts point to a 75 per cent hike in the net cash position in the current financial year. Moreover, expect the board to continue to use its excess cash to make earnings accretive share buy backs. The company repurchased £6m of shares at 260p each in the 2015 financial year, and at last month’s annual meeting shareholders sanctioned a buyback of up to 20 per cent of the existing share capital.
A few board changes are worth noting. Founders Kiran Shah and Jon Driver, who control 17 per cent of the equity between them, are stepping down from their respective roles as finance director and marketing director, but remain as joint managing directors. Current finance officer Mark Dowding is promoted to finance director, and Jerry Healy, currently marketing director of Character’s principal operating subsidiary, takes the same role on the main board. The third founder, Richard King, will remain in office as non-executive director and chairman of the board. These senior management changes look sensible to me.
So, with Character’s shares trading on a modest 10 times earnings, offering a 2.5 per cent prospective dividend yield, the board committed to continuing its policy of making earnings accretive share buy backs, and the upside from the Teletubbies toy launch being underestimated by investors, I have no reason at all to alter my positive stance.
In fact, having first advised buying Character’s shares at 415p ('Playtime', 1 June 2015), I can envisage a further 20 per cent upside to my target price of 600p. If achieved this would value the company’s equity at £130m, or the equivalent of 13 times earnings. Please note that I last advised buying the shares at 485p (‘Playtime for a popular character’, 2 December 2015). Buy.
Funded for solid growth
Bath-based 1pm (OPM:67p), a specialist provider of finance to small- and medium-sized enterprises (SMEs) and a constituent of my 2014 Bargain Shares Portfolio, has delivered half year results that beat my expectations.
A three month contribution from last summer’s £12m acquisition of Academy Leasing, a provider of equipment finance and an equipment and vehicles broker to the SME market ('Powered up for gains', 29 July 2015), combined with strong organic growth, resulted in pre-tax profits and revenues more than doubling to £1.66m and £5.25m, respectively. After factoring in a placing and open offer to part finance the Academy Leasing acquisition, EPS increased by more than half to 2.91p. This leaves the company well placed to increase revenue from £5.5m to £12.1m in the financial year to the end of May 2016 and almost double pre-tax profit to £3m. On this basis, analyst Eric Burns at house broker WH Ireland expects full-year EPS to rise a third to 4.9p, and the dividend per share to be lifted by two thirds to 0.7p.
I feel those estimates could yet prove conservative and so too does Mr Burns who sees “scope for 1pm to surprise on the upside as the year progresses”. He has a point given the strength of the company’s finance offering: around £9.7m of new lease and hire purchase contracts were written in the six month trading period, representing a 67 per cent year-on-year rise; £6m worth of business loans written represented a six-fold increase year-on-year; and the loan portfolio has surged by 30 per cent to £57m since May 2015. Of course, credit quality has to be monitored closely when a business is ramping up lending so sharply. But there are no concerns here with bad debts accounting for only 0.28 per cent of the total portfolio.
So, with the full benefit of the Academy acquisition set to come through in the next financial year, I am comfortable with predictions that 1pm’s revenues can rise by a third to £16m in the 12 months to end May 2017. Importantly, the company has facilities in place to fund such robust growth. On this basis, Mr Burns forecasts a 40 per cent ramp up in pre-tax profit to £4.2m to produce EPS of 6.3p, implying 1pm’s shares are trading on little over 10 times earnings estimates for the 2017 financial year and offer a 2.2 per cent prospective dividend yield based on a trebling of the payout to 1.5p a share.
On a bid-offer spread of 64p to 67p, and offering over 20 per cent-plus upside to my target price of 82p, I continue to rate 1pm’s Aim-traded shares a buy.
Entu poised for chart break-out
Shares in Entu (ENTU:68p), a UK supplier and installer of windows, doors, solar panels and other energy efficient products, appear to have based out following the turmoil that impacted its business last year.
Having crashed by 40 per cent at the start of September when the company announced it was withdrawing from all of its solar panel activities, details of which Entu discussed at great length at the time (‘Shareholder activisim works’, 2 September 2015), investors have been patiently waiting to see whether Entu would deliver the steeply downgraded full-year pre-tax profits forecasts of around £8m as analysts at house broker Zeus Capital had predicted. It did so last week. The declared dividend of 2.67p a share also matched the guidance offered by Entu's board five months ago to give a full-year payout of 5.34p, albeit this was well below the 8p a share investors who backed the 2014 autumn flotation were anticipating. The payout is covered 1.8 times by EPS of 9.9p from continuing operations.
There was positive news on the order book too which has hit a record £27m, reflecting a successful turnaround of last March’s acquisition of Astley Facades, a company with a market-leading reputation in energy efficient exterior wall insulation, render and specialist cladding for new-build construction and the refurbishment of existing building stock. That business was loss making at the time of acquisition, but is now profitable.
Other positives include a corporate contract with B&Q to address the energy efficient windows and doors market. Analyst Tom McColm at Zeus Capital believes it has potential to contribute £10m of annual revenues to Entu’s home improvements business although he has not factored any contribution into his current year estimates. Last autumn’s disposal of Entu’s loss-making kitchen interiors business, Norwood Kitchens, certainly made sense as did the decision to exit solar panel activities following the government's announcement to cut feed-in-tarrifs by up to 90 per cent.
That’s not to say profits will bounce back this year. Guidance from chief executive Ian Blackhurst is that they will be marginally below last year's outcome. Mr McColm expects revenues to rise by around 5 per cent to £104m in the 12 month period to end October 2016, but underlying pre-tax profits to decline from £8m to £7.5m. On this basis, expect EPS of 9.1p and a held dividend of 5.3p. The forecast is based on a flat performance in both Entu’s home improvement division, accounting for about 80 per cent of revenues and half of its profits; and its repair and renewals cover plan division which generates chunky operating profit margins of 79 per cent and earns Entu around £2m a year in profits with a run-off value of around £12.5m based on current attrition rates. The shortfall is expected to come from the slimmed down energy saving and insulation business which accounted for just under a quarter of operating profits last year.
Priced for recovery
That said, with Entu’s shares rated on only seven times current year earnings estimates, and offering a chunky dividend yield of 8.2 per cent, the rating already suggests the company will struggle to generate growth this year. In fact, the earnings risk looks slightly skewed to the upside if the B&Q contract delivers, or the board use their debt free balance sheet to make selective bolt-on acquisitions. It’s worth pointing out that all of Entu’s manufacturing is outsourced and a large proportion of its’ workforce is self-employed. These factors mitigate risk. Also, products are bought to order with a stock turn around cycle of under a week which explains why Entu’s asset light business is so highly cash generative. It also avoids having to run high stock level and take on inventory risk.
Interestingly, a share price close at 69p or above would not only signal a point & figure chart break-out, but also that the five month consolidation is over. In the circumstances, I would recommend holding onto Entu's high yielding shares at 68p for their recovery potential.
Please note that I first recommended buying Entu’s shares at a 5 per cent premium to the float price of 100p ('Yielding to efficiency gains', 10 November 2014) and the price subsequently hit a high of 147p last April (‘Riding the news issues gravy train’, 15 April 2015). I last rated the shares a hold at 65p when the problems in the solar business, which prompted the share price crash, came to light (‘Shareholder activisim works’, 2 September 2015).
MORE FROM SIMON THOMPSON...
I have written articles on the following companies this year:
■ Grainger: Buy at 243.5p, target 280p; Dart: Take profits at 580p; Crystal Amber: Hold at 159p; Redde: Take profits at 203p; Burford Capital: Run profits at 196.5p; Renew: Run profits at 404p; Plethora Solutions: Speculative buy at 4.5p ('Stock check', 5 Jan 2016)
■ Elegant Hotels: Buy at 118p, target price 130p to 135p ('Check in for a profitable stay', 6 Jan 2016)
■ Safestyle: Run profits at 272p ahead of pre-close statement on 25 Jan 2016 ('Clear cut gains', 6 Jan 2016)
■ Epwin: Run profits at 143p, new target 170p ('Epwin on the acquisition trail', 6 Jan 2016)
■ GLI Finance: Recovery buy at 37.5p ('GLI shelves fundraise and its chief executive', 6 Jan 2016)
■ LXB Retail Properties: Buy at 97.5p, new six-month target 120p; Urban&Civic: Buy at 286.5p, target 325p; Conygar: Buy at 172p, target 200p ('Hot property, 7 Jan 2015)
■ Somero Enterprises: Buy at 139p, target 185p; 1pm: Buy at 70p, target 82p; First Property: Run profits at 53p; Avation: Buy at 145p, target 200p ('Small-cap value plays', 11 Jan 2016)
■ 32Red: Run profits at 147p; Netplay TV: Buy at 7p ('Chipping in', 12 Jan 2016)
■ Cambria Automobiles: Buy at 87p, new target 95p; Vertu Motors: Buy at 76p, target range 85p to 90p ('Motoring ahead', 12 Jan 2016)
■ Global Energy Development: Hold at 24p ('Cash rich, but unloved', 12 Jan 2016)
■ KBC Advanced Technologies: Bank profits and sell in the market at 183p ('Tech watch, 13 January 2015)
■ Sanderson: Buy at 75p, target range 85p to 90p ('Tech watch, 13 January 2015)
■ Trakm8: Buy at 300p, new target 400p ('Tech watch, 13 January 2015)
■ Amino Technologies: Buy at 120p, new target range 155p to 160p ('Amino has the ammunition', 14 January 2015)
■ easyHotels: Buy at 89p, initial target 100p ('easyHotels ramps up expansion', 14 January 2015)
■ Stanley Gibbons: Hold at 58p ('Stanley Gibbons fundraise', 14 January 2015)
■ Miton Group: Buy at 28p, target 35p; Moss Bros: Buy at 97p, target 120p to 130p; Bioquell: Buy at 140p, minimum target 170p; UTV Media: Trading buy at 184p ('An awesome foursome', 18 January 2015)
■ Equity market strategy ('Bear Market signals', 25 January 2015)
■ STM: Buy at 47p, target 80p; Stadium: Trading buy at 103p; Fairpoint: Run profits at 150p, target range 200p to 220p ('Exploiting market anomalies', 1 February 2015)
■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking
