Spin Master Corp (TSX: TOY) is a Canada-based children’s entertainment company which creates, designs, manufactures, and markets a portfolio of toys, games, products, and entertainment properties. The company’s operating regions are North America, Europe, and Rest of World.

• Robust Financial: Despite the turbulent environment, the Company maintained its pace and achieved strong results in revenue, EBITDA, and net income. Revenue and EBITDA climbed to USD 2,042.4 million and USD 384.1 million in FY21, from USD 1,570.6 million and USD 124.5 million in FY2020, respectively. Even the net income increased by 336% throughout the same period, demonstrating the company's exceptional success. The Company is working hard to maintain its winning streak and has seen increasing scale on a sequential basis, which is encouraging.

Source: Company, Analysis by Kalkine Group 

• Healthy performance from all product categories: The company's revenue in FY 2021 was USD 2,042.4 million, a 30.0% increase from USD 1,570.6 million, led by sales growth in Toy, Entertainment and Licensing, and Digital Games. The toy division is the company's largest revenue generator, accounted for 85% of total sales in FY2021. Toy revenue climbed by USD 316.2 million, or 22.3%, to USD 1,731.8 million, with growth in all product categories, notably Preschool and Dolls & Interactive. The other segments also showed improved results, with Entertainment and Licensing revenue increasing by USD 57.6 million or 73.7% to USD 135.8 million in FY 2021, driven by distribution revenue from PAW Patrol, and Digital games revenue increased by USD 98.0 million or 127.6% to USD174.8 million.

Source: Company, Analysis by Kalkine Group

• Focused on achieving long term growth: The company's continued focus on long-term growth is a significant advantage. To achieve this long-term growth, the company has established key strategies such as increasing international sales in developed and emerging markets, developing global evergreen entertainment franchises, establishing a leading position in digital games, and leveraging its global platform through strategic acquisitions and investments.

• Robust increase in cash flow from operating activities and free cash flows: In FY2021, the company's cash flow from operations was USD 419.1 million, up 35% from USD 310.8 million in the previous corresponding period. The increase in operational cash flows is related mostly to greater net income and a decrease in net working capital change. Furthermore, the business finished FY2021 with the highest free cash flows in its history, at USD 339.6 million, a 46% increase over USD 232.1 million in FY 2020.

Source: Company, Analysis by Kalkine Group 

• Healthy Guidance for FY 2022: The Company anticipates that in FY 2022, its Gross Product Sales and revenue will rise in the mid to high single digits over 2021, while adjusted EBITDA margin will be consistent with 2021.
• Strong liquidity: The key source of liquidity for the company is cash flow from operations. Working capital requirements vary throughout the year due to the seasonal nature of the toy sector. On December 31, 2021, the Company had USD 1,080.2 million in unutilized liquidity, consisting of USD 562.7 million in cash and cash equivalents and USD 517.5 million under its credit facilities. Furthermore, it thinks it has enough cash to fulfill its operating needs.
  

Risks associated with investment 

Many factors can play a pivotal role in the company's business, such as disruption in customer behavior and consumer demand and disruption in the supply chain. Other than this, any further government-imposed restrictions and the closure of retail location could reduce the consumer traffic, which could affect the group's financials.

Financial overview of FY 2021

Source: Company filing

• Strong revenues: The company’s revenue for Fiscal 2021 increased by 30.0% to USD 2,042.4 million, compared with USD 1,570.6 million in Fiscal 2020. An increase was mainly driven by revenue growth in Toy, Entertainment and Licensing and Digital Games.

• Higher gross profit: The company reported its gross profit at USD 1,056.6 million, representing a gross margin of 51.7%, compared to USD 727.9 million or 46.3%. of revenue in the previous corresponding period. The improvement in gross margin was as a result of cost reductions resulting from the Company's operational improvements and productivity initiatives, favorable changes in product mix.

• Lower SG&A expenses as a percentage of revenue: In the reported period the company’s SG&A decreased as a percentage of Revenue to 36.4% compared to 40.3%, primarily from lower distribution partially offset by higher marketing and administrative expenses.

• Robust Net income: The company clocked multifold jump in its net income at USD 198.6 million compared to USD 45.5 million in pcp. This elevated numbers were on the back of higher revenue and high earnings before income tax, partially offset by income tax numbers.
  

Top-10 Shareholders 

The top 10 shareholders have been highlighted in the table, which forms around 33.86% of the total shareholding. Mackenzie Financial Corporation and T. Rowe Price International (UK) Ltd. hold the company's maximum interests at 17.65% and 5.03%, respectively. The company's institutional ownership stood at 42.55% and ownership of the strategic entities stood at 1.22%. Higher institutional holding boosts the confidence in the mind of retail investors. 

Valuation Methodology (Illustrative): EV to Sales based Valuation Metrics

Stock recommendation

In 2021, the company generated very excellent growth across all three creative areas, demonstrating its continued dedication to providing magical play experiences for children and their families via inventive toys, engaging entertainment, and creative digital games. As it enters 2022, the group is focused on further developing the full potential of Toys, Entertainment, and Digital Games, with a greater emphasis on customer centricity, driving innovation, building evergreen entertainment franchises and digital games, expanding its international markets, and optimizing the operating platform.

For the year, the corporation increased Gross Product Sales by more than 20%, total revenue by 30%, and surpassed USD 2 billion for the first time, which is a significant positive. In addition, the firm had its highest free cash flow in history with USD 339.6 million, up 46% from USD 232.1 million in FY 2020, and completed the year with accessible liquidity in excess of USD 1 billion. Furthermore, the company is in a great financial and operational position to produce and sustain long-term, profitable growth.

Therefore, based on the above rationales and valuation, we recommend a "Buy rating on the stock at the current market price of CAD 41.77 at 09:47 A.M Toronto time on March 10, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on March 10, 2022). Source: REFINITIV, Analysis by Kalkine Group 

Technical Analysis Summary

Disclaimer

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