Despite producing record earnings in its last full year and operating in a thriving market, this producer and distributor of animated TV series has seen its shares almost halve in less than a year.

That shouldn’t faze you though, as plain speaking chief executive Allen Bohbot recently stated that ‘the first half alone will be significantly above last year’. Furthermore, BKN recently opened a Spanish office to fortify activities in Spain, Portugal, Italy, France and Latin America and has entered the home entertainment and new media distribution business in the UK and US to take greater control of the distribution of the company's content in all emerging forms. All in all, this looks an opportune time to invest – even more so given the fact that the shares trade at a discount to the sector average.

Moreover, BKN is a substantial business. In the last ten years the company has freshly produced a catalogue of 70 different TV series of 26 episodes each – including many successful global brands including Legend of the Dragon, Adventures of Sonic The Hedgehog, and one you may have heard of about an oversized gorilla named Kong. These are sold in over 90 countries around the world. Generally the contracts are sold to broadcasters for three years, providing 60 per cent of the deal revenue, with DVD sales and merchandising (including computer games, mobile phone games, toys, etc) adding more revenues.

Bohbot, one third of a well incentivised executive board, with 19.2 per cent of the shares, cites Legend of the Dragon (currently on BBC 1 in the UK) as an example of the finances associated with each new series. BKN spent €5.2 million to produce and launch a 26-part new title, and has subsequently taken €7.5 million in revenues so far.
‘We would be disappointed if we didn’t take €2 million from further merchandising,’ insists Bohbot, as these revenues will ‘really kick in’ when the merchandise comes out this autumn, thus almost doubling their money from production of the series. And three years after the initial deal, the TV rights are returned to BKN’s catalogue to sell on again.

The catalogue, from a standing start in 2000, now generates ‘more cash per month than it takes to run the entire business,’ boasts Bohbot. ‘So if we never produced another series we’d still make money!’ Cash generation improved enormously in 2005, as €6.0m was made from operating activities, from €61,000 the year before.

BKN looks to produce two to three new series annually and does not plan to increase this – ‘we want to make sure they’re big’ – keeping the focus firmly on quality not quantity. ‘If a production company tells you they’re doing a lot of new stuff that means nothing’s working.’

As regards its pipeline, BKN is seeking to take advantage of the strong demand for the Legend title, commissioning 13 new episodes to form Season II, which will be sold this summer. After presenting at the MIPCOM industry jamboree last autumn, the company has high hopes for its new series, Dork Hunters From Outer Space, an action-based comedy to be launched in September. A further Kong film is in production too.

The industry is in the pink, says Bohbot: ‘People are spending money and everyone is making a profit and we have a lot more new products than before – and they feel right.’ On the subject of the much-vaunted market consolidation, Bohbot mentions that a handful of potential suitors have come sniffing but ‘there hasn’t been anyone of sufficient size to step up’. Potential acquisitions for BKN are a possibility and would be in the UK as ‘this is the right market, not the US or Europe’.

Possibly partly to this end, BKN’s cash situation was improved by the €5.65 raised from two bond issues last year, and it has no short-term debt or short-term lending obligations. Carried forward tax losses mean the company does not expect to pay more than around 15 per cent tax this year and next. A solid buy.