Shares: Top toys turn profit into child's play

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The Independent Online
THE BRITISH toy industry is alive and well but dominated by China. That is a slight exaggeration, but not much.

The wonder stock of Britain's tiny, quoted toy-share sector, Bluebird Toys, has about 300 staff at its head office and factory in Swindon, Wiltshire. But indirectly it employs 15,000 Chinese and nationals of other developing countries to produce its world-beating Polly Pocket and Mighty Max ranges.

Similarly, Hornby manufactures for the hobby buyers of its trains and Scalextric cars here, but such toys as its range of Gladiator figures (based on the television programme) are made in China.

Bluebird is on a spectacular profits roll. When I last wrote about the company, I was looking for full-year profits of pounds 5m against pounds 1.6m last year and a hefty loss in 1991. Since then the news has become even better.

The company has 'warned' profits will exceed expectations - with something in the area of pounds 8m in prospect. The shares haven't climbed much further, with investors suspecting 1993 may be unrepeatable. But Polly Pocket is still growing after four years; Mighty Max was launched last year and Bluebird plans to extend the range.

Bluebird's North American partner, Mattel, has made Barbie an ever-growing perennial on the toy scene. If Bluebird can do the same, there is plenty more global growth to come and the shares are still a buy at 575p.

Perennial bestsellers are the grail of the toys and hobbies market. Hornby, the model maker founded by Frank Hornby between the wars, has two reliable blockbusters in its Hornby trains and Scalextric cars, which together account for 75 per cent of its pounds 30m-plus turnover and an even bigger share of its profits.

The wild card that has accounted for much of the recent profits volatility is toys. In 1990 turnover soared to nearly pounds 40m and profits peaked at pounds 3.82m, helped by a Batman range based on the film. Since then recession and the lack of a similar toy success has left the group sliding backwards, culminating in a loss of nearly pounds 800,000 in the first half of this year, when the share price fell almost to 130p.

The second half is going much better, helped by the Gladiator toys and a clever gadget called Game Genie, which enhance the performance of Nintendo and Sega video games. Profits should match last year, despite the dreadful first half, leaving the group well placed for 1994 and making the shares attractive at 184p.

The biggest surprise in the toys and hobbies market is the bicycle maker, Casket, at 40p, which is building a huge new factory to return manufacturing from China to the UK. However this is not quite what it seems. Bikes imported from China are subjected to a 50 per cent anti-dumping tariff. The plan is to import components (frames, handlebars, wheel-rims and gearboxes) from the Far East. The advantages of UK assembly are vastly improved delivery and service for retail customers, plus a lowering of component costs through the group's huge purchasing power, based on a 25 per cent share of the British bicycle market and a recently acquired 2 per cent share of the German market, which is three times larger.

The group is in the throes of a share placing at 36p (closing tomorrow) to finance the German deal, which is the first move in a strategy to build a share in the huge European bicycle market.

At the same time, management is taking action to improve returns on its clothing business, much of which goes to supply imported basics to the value-for-money chains. Forecasters are looking for profits to jump sharply to pounds 6.2m in 1994-95. This would drop the price-earnings ratio close to 8, which should leave the share price with room for progress next year.

(Photograph omitted)