Letting Go Of Character Group Plc (LON:CCT) & Welcoming Arcontech Group PLC (LON:ARC)

I sold my shares in Character Group plc (LON:CCT) today for a substantial loss. As I wrote in last week's update it looks like the company is going to lose its biggest selling brand Peppa Pig  which would likely decimate group profit. I was aware of the risks posed by CCT not owning many of the brands behind the toys it makes prior to purchasing the stock and bought it anyway because it traded on a low earnings multiple. This was a mistake. In one sense I got unlucky since CCT has been making Peppa Pig toys for many years and yet just a few weeks after buying the stock the risk eventuated. However, the reality is that CCT has a flimsy business model and so I should never have owned the stock ie it was cheap for good reason. An article I read suggested that UK companies (including Entertainment One owner of Peppa Pig) are getting bought out due to the weak pound. Of all the ways I could fathom getting skewered by Brexit, this was not one of them.

I immediately used the proceeds from the CCT sale to purchase Arcontech Group PLC (LON:ARC), a niche software provider to major financial institutions. Its products enable banks and other market participants to collect, combine, present and distribute market data from multiple sources. The company exhibits high operating leverage, strong cash generation, consistent growth and recurring revenue and I estimate the stock trades on a forward enterprise value to free cash flow multiple in the teens. Customer concentration is a key risk with four customers contributing 65% of revenue in 2019. However, revenue has risen every year under current CEO Matthew Jeffs tenure (since 2013) including in 2016 when Arcontech lost its second largest customer (contributing 16% of sales in 2015).

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