Thursday, November 09, 2006

My Analysis of Funtastic Ltd and its Purcahse

Funtastic Lts's strategic alliance looks a very good purchase but the other news is not so good.

The new alliance will offer a competitive advantage and growth opportunities to the company and it did not overpay for Judius. This is shown by the value only being 5.4 of EBITA.

The bad news is they came out with a revised earnings guidance which is down by 25% on market expectations.

But lets look at the numbers :

Revenue new estimate of around 353 - 362. This comes within my esitmate.
Unfortunately the Net profit is going to fall from 21 million to 12-15 million.

They are implementing a cost saving resturucture that will save 5 million a year. Right here I have to ask WHY wasn't this implemented earlier ? This shows poor management skills. It also shows that they are not focused on returning the best results for shareholders. If this had been implemented 3 years ago they could have provided an extra 15 Million for shareholders.

While I am bagging them out a bit above I still like the prospects of the company. They need to get control of spending and make these acquisitions work for them before the stock price will start to move positive.

I expect it to open lower today based on the trading update and it may be a buying opportunity if it drops much lower as even at this level the stock is very cheap.

Good luck Trading.


Anonymous said...

Hi Paul,

Thanks for your site, I share alot of similar views on investing, I enjoy your insights.

I have a large position in FUN. Now have same average buy price as ABS has come in at (they MUST be a believer themselves to 'pay' that and obviously knowing of the profit warning to follow?). Of course feeling a little pain but in remembering I got in on a longer term (circa 3 years) view I'd still like to think they can get their stuff back together...or with Groves as substantial holder he will give them some impetus to do as much (or else buy the compnay himself in due course). I have some friends in toys, Tony Oates is a friend and went to their wedding. They confirm that FUN has been going thru' a very hard time, it's common knowledge within the field, Bratz has done it's day as per Leap Frog apparently. You'd like to think their surely can't be 'too' much pain left (<$1??) in the price and if you bought and held now you'd have done well once housing, rates, petrol, sentiment improves perhaps 2008 onwards. Hopefully they could also maintain same dividend. I'd like to think Buffett would also be close to getting in on the stock but not sure it would truly meet his requirements. Not sure if I really want to join the herd and clear out my position, I can just see it bouncing back up in due course. Perpetual must really be in the hurt locker right now. Roger Montgomery at Clime told me a couple weeks back he cleared out on the back of management concerns. But if it went to 1.20 and I had the coin, I'd be tempted to buy in especially with Groves as a holder and the potential increased market for FUN thru' Judius and ABC Centres in the states now. Might take a while for earnings from that to kick in but most analysts aren't looking outside 6-12 months. I'd also be more comforted if they had another Bratz or similar ready for launching.

Sorry for the jibber...lol....and please excuse any naivety in my lingo or knowledge in comparison to yourself.

Kind regards,

Matt K
Manly Vale

Paul Smith said...

Thanks for the comment. I agree they are going through painful times at the moment but that is usually the best time to buy if you think they are a good company(which I do). I am waiting for it to find a base before I put any more cash into it but I definitely will be putting in some more in the future. Theya re a good company in my opinion and I think they are still yet to experience the earnings potential from the sudden baby boom. I believe in 2-3 years there will be a major upturn for the company. They need to take this time to cut costs and analyse the business. I think management is good enough to do it and hopefully it works out for them and us.

The current share price is a huge discount even on the new estimates. Funds are always moving in/out of stocks too early and there is no chance I would be following the herd on this one. The dividend yeild and future potential (due to massive spike in births the last couple of years) should hold this company above the $1 level. In fact I would be surprised if it fell below $1.20.

Wait a few weeks and see what happens. I could be wrong but I suspect you will find at this level there may even be some pivate equity interest. They could offer $1.80 - $2.00 and most invetors would take it.

Good luck.