Toy, clothing, confectionary and film group Funtastic (FUN) is one financial disaster that missed the reporting season which ended on Friday night.
And after yesterday’s update and the way the shares have traded in the past month to six weeks (it incurred a please explain from the ASX last month after the shares fell from 17.5c to 13.5c), it’s no wonder investors threw up their hands and bailed out – sending the shares down 20% to just 12c at the close, the low for the day.
Funtastic only avoided being one of the disasters of the December 30 reporting companies because it has September 30/March 31 balance dates for full year and interim reports.
Judging by the red ink and disaster in an update revealed yesterday (after the company asked the ASX for trading in its shares to be halted last Friday), Funtastic is in trouble.
Ostensibly the update was to reveal that the company had decided to sell a subsidiary called Madman Entertainment business after receiving two expressions of interest from potential buyers.
According to Funtastic, "Madman Entertainment showcases Australian film, world cinema, children’s content, anime, sports and other special interest categories". But despite that wonderful sounding description, it is obviously a good performer in the eyes of independent buyers.
But that company then told the market that the bids suggested the book value of the business was inflated by between $22 and $28 million, "which will lead to an impairment charge".
Based on the statement, the value of Madman in Fantastic’s books was around 100% overvalued – $52 million was its latest book value against the estimated over valuation of $22 to $28 million.
That’s a serious over valuation and raises questions about the rest of the company’s assets.
FUN 1Y – Updates take the fun out of Funtastic as big losses exposed
And then Funtastic also provided a trading update in its statement to the ASX saying that its first half results will be “significantly lower than prior year”.
“The full-year outlook for the business without the sale of Madman (excluding impairment charge) will see EBITDA in the range of $19m to $23m (previous year $24.1m including significant items) and sales growth of 10-15 per cent,” Funtastic said.
But the estimate excludes the impact of any impairment/loss on the sale of Madman.
It is very possible Funtastic could trade at a whacking great loss in the year to March 31 (the first half) and the year to September 30. That’s part of the reason why the shares fell, along with the raised eyebrows at how the company could carry Madman in its books at such a large overvaluation.
"It is anticipated that we will finalise a possible sale transaction of Madman prior to announcing our first half results and that our half year accounts will present Madman as a business up for sale," Funtastic said in yesterday’s statement.
And whatever money the company gets from the sale of Madman, the proceeds would go to cutting debt.
Looking at the profit downgrade (before the impact of any Madman loss) Funtastic said several factors would contribute to the group’s lower first half results.
They included increased costs; a weaker currency exchange rate; poor performance by key brands Leapfrog, Power Rangers and Ben 10; a significantly lower performance from Madman; and continued investment in international expansion.
That sounds a real disaster for the company.
Funtastic’s first half earnings before interest, tax, depreciation and amortisation (EBITDA) – excluding the Madman impairment – are expected to be in the range of $3 million to $4 million. The losses from the impairment means a big loss for the company.
EBITDA for the full year – without the sale of Madman and excluding the impairment charge – is forecast to be in the range of $19 million to $23 million.
Funtastic expects core sales to grow by about 20% for the year to September, and by 30% to 40% in the second half, partly driven by the positive impact of a new US distribution agreement for the Chill Factor slushy and ice cream makers.
It is a long, long way from the way Funtastic seems to have been recovering from a near death experience during the GFC and its aftermath (big losses from an involvement with the failed ABC Learning and a slide in revenues in the tens of millions of dollars).
For the 2012-13, the company reported full year EBITDA of $23.976 million compared with $20.198 million in FY12.
"Net Profit for the period rose to $13.962 million, an increase of $3.526 million or 17%, and included a gain of $3.272 million on the early settlement of deferred acquisition consideration," the company reported.
And the solid profit (although the over valuation of Madman should raise questions about the profit), allowed the company to pay its first dividend since 2006 – 0.5c a share. Not much, but a sign of the company’s apparent recovery. The question of a dividend wasn’t raised in yesterday’s statement.
The loss on the Madman deal and slide in earnings will raise doubts about whether that dividend payment can be repeated for 2013-14. It looks very doubtful.
