Toys, games and giftware distributor Character Group’s (CCT:AIM) shares cheapened 9% to 338p on a full year profit warning blamed on disruption in Scandinavia and margin pressure caused by the weakening of the pound against the US dollar.

However, the share price decline was moderated by the fact the maker of Peppa Pig, Fireman Sam and Pokémon-branded ranges assured it will maintain the final dividend, management confident in the group’s ‘continued profitable performance and balance sheet strength’.

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Shares in Character were already under pressure before today, with investors pricing in a potential loss of a valuable licence for Peppa Pig-related products (see below). In today’s update, Character warned pre-tax profit for the year to August 2019 is likely to be ‘in the range of £11m to £11.5m’.

This is ‘slightly under the lower end of current market expectations’ and roughly 20% below Panmure Gordon’s estimates.

In the recently-ended second half, several factors clobbered Character. Chief among them was the impact on Danish toy distributor Proxy - in which Character has a 75% stake - of the demise of Proxy’s key customer Top Toys, the latter’s liquidation attributed to the delayed recovery in the Scandinavian retail market.

Also at play was uncertainty over Brexit and the associated slump in sterling. This has pressurised margins because the bulk of Character’s purchases for UK distribution are made in dollars.

TRUE TEST OF CHARACTER

Character is being very supportive of Proxy, having set up a new Danish subsidiary that has acquired all of its stock and providing inventory to Proxy as it receives orders from customers. While its efforts to prop-up Proxy reduced Character’s cash flow last year, the board insists Proxy ‘will return to profitable trading in the current financial year’.

Rattled toy designer Character also addresses the thorny issue of Hasbro’s takeover of Peppa Pig brand owner Entertainment One (ETO). Although no talks have taken place with Hasbro, Character’s current Peppa Pig licence has been extended by Entertainment One for a further six months to June 2021.

Character also announced the launch of Goo Jit Zu, a new in-house brand developed in collaboration with an unnamed overseas toy company, management flagging a ‘very enthusiastic’ reception to the product line in the market from its customers and global distributors.

THE PANMURE VIEW

Downgrading its price target from 530p to 449p, yet sticking with its ‘buy’ rating on Character, Panmure Gordon explained: ‘With the shares already under pressure due to the potential ownership change of Peppa Pig the timing of this update is particularly inopportune. Whilst undermining investor confidence in the short term we view each of these issues as resolvable within a two year time horizon. As seen with the recovery in performance post Toys R Us, Character Group is a key UK player within a resilient industry.’

The broker added: ‘In our view the potential loss of Peppa Pig product sales has been factored in and there is now a two-year window to develop replacement ranges.’

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Issue Date: 13 Sep 2019