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

Key Highlights

• Sequentially falling margins: In Q4 2021, the company failed on maintaining its pace and witnessed lower performance under the operating margin matrix, consisting of EBITDA margin, operating margin, and net margin, which exhibits extreme pressure on the company.

Source: REFINITIV, Analysis by Kalkine Group 

• Lower margin profile v/s Industry: In Q4 2021, the company clocked lower margins under the operating margin matrix, consisting of EBITDA margin, operating margin, and net margin, implying an extreme pressure on the company.

Source: REFINITIV, Analysis by Kalkine Group

• Higher average collection period: The company is having a higher average Accounts Receivable day of 65.5 days, against the industry median of 34.9 days. A higher average collection period indicates that the organization collects payments slower. This may create a difficulty for the company to have enough cash on hand to meet its financial obligations.

• Stretched valuations: TOY shares are available at an NTM Enterprise Value/Sales multiple of 1.5x compared to the Sector (Consumer Cyclicals) median of 1.1x, while on NTM Price/Equity multiple, it is trading at 17.3x compared to the sector median of 10.3x. This implies that the shares are overvalued against the industry. Higher valuations against an industry with fading financials draw a caution line.

Source: REFINITIV, Analysis by Kalkine Group

Stock recommendation

In 2021, the company saw significant growth in all three creative centers: inventive toys, engaging entertainment, and creative digital games. For the year, it increased Gross Product Sales by more than 20%, total revenue by 30%, surpassing USD 2 billion for the first time, and Adjusted EBITDA by more than USD 414 million, with an Adjusted EBITDA Margin of more than 20%, another record. However, the company's margins are declining sequentially, and its operating margins are lower than the industry median in Q4 2021, signaling that it is under severe pressure. Additionally, it is having a higher average collection period compared to an industry median, indicating a weak liquidity profile as well as it is collecting its payments at a slower pace. Furthermore, on an NTM basis, the stock is trading at a premium to the industry on many parameters. Higher valuations versus an industry cast a shadow of doubt on investors' minds. Therefore, based on the above rationales and valuation, we recommend a “Watch” rating on the stock at the closing price of CAD 46.42 on February 28, 2022.

One-Year Price Chart (as on February 28, 2022). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

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