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9:28AM Monday Jun 25, 2012
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Funtastic turning around a grim toy story
Ian McIlwraith
June 25, 2012 - 8:16AM

If you were busy watching banks and fund managers happily dak Billabong International in its capital raising last week, you may have missed seeing some canny investors snuggling up to Pillow Pets-licencee Funtastic's $24.6 million issue.

The $6.8 million placement has been done, and Insider understands that the $13.4 million accelerated institutional offer was bedded down over the weekend, with investors like Simon Marais' Allan Gray stepping in to take up the shortfall from those fund managers that did not want to play.

Unlike Billabong's hugely dilutive, heavily-discounted share offering, Funtastic was asking investors to stump for only one share in every three that they already owned and pitched the offer at 14.5 cents — a discount of less than 10 per cent to the market.
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The difference between the two companies, apart from scale, seems to be that Funtastic is showing tangible signs of being through the worst. Funtastic's horror stretch started four years ago when key business partner, Eddie Groves' failed ABC Learning Centres, fell apart.

And also unlike Billabong, Funtastic's board has committed to paying a dividend early next year, equivalent to 50 per cent of earnings — a payout that, if Insider's envelope scribbling are correct — will represent an effective yield on the issue price of more than 10 per cent, and as much as 12 per cent after franking credits.

Until now, Funtastic has been forbidden under its lending agreement with National Australia Bank from paying any money to shareholders until it reduces debt in abolsute terms, and in relation to earnings.

Because Funtastic intends using $15 million of the funds raised to feed NAB's demands, well in excess of the $5 million required for the June half year, the bank has agreed to lift the payout restraint — so long as total repayments are $20 million by December 31.

Funtastic's chief executive, Stewart Downs, says that NAB has been a supporter and that the capital raising was driven by the company wanting to rebalance the debt and equity position.

Downs' board is forecasting earnings before interest, tax, depreciation and amortisation of between $23 million and $25 million for the 2013 financial year. For the one that ends this week, it is confident of $20 million in EBITDA — which means next year is heading for 20 per cent growth.

With net debt down to $55 million, and tax credits for the next three years, Funtastic is likely to have a net profit of close $17 million in 2013.

Based on its post-raising issued capital of 537 million shares, that is potential earnings per share of a little over 3 cents and a dividend of 1.5 cents inext year.

Bell Potter is lead manager on the issue, but not underwriting it. The last time Funtastic did an underwritten issue, it was backed by one of the company's three major shareholders, Craig Matheson.

Matheson, nephew of well-known liquor industry figure Bruce, and his fellow major shareholders — toy industry figure Nir Pizmony and Lachlan Murdoch's private company Illyria — are backing the issue, although not taking up their full entitlements. Murdoch has a fair bit of capital tied up in the wallowing Ten Network, so he ought to be glad Funtastic seems to be turning around.

Under Downs, Funtastic has moved from being a mere distributor of toys, squeezed between supplier and retailer, to selectively acquiring intellectual property on what it sees as key brands.

As such, Funtastic has bought rights to the Pillow Pets brand in most markets — although the US and China are excluded — and joined in extending the brand by producing versions of the products in the colours of Australian Football League and the European Premier League.

That brings what were cute, fluffy plush toys for kids into the adult collectable world — you may not be able to share a pillow with Hawthorn's Lance "Buddy" Franklin or the likes of David Beckham, but you can at least get your head on a pillow fashioned after the club for which they play.

Similarly, Funtastic earlier this year picked up what are effectively three-year merchandising rights for the Lego brand — so it can manufacture and distribute items like luggage, accessories and stationery in sympathy with the famed Danish building blocks.
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