Spin Master Corp.

Spin Master Corp. (TSX: TOY) is a children's entertainment company operating in the nearly USD 90 billion global toy industry. The group creates, designs, manufactures, and distributes a portfolio of products, brands, and entertainment properties across five key categories namely, outdoor, remote control and interactive, boys action and construction, preschool and girls, and activities games and puzzles and plush. 

Key Highlights:

• Expanding footprints via aquations: Spin Master has been expanding its leading position within the Games category through acquisitions of new titles and innovative partnerships and collaborations. Recently, the company announced it would acquire London -based Rubik's Brand Ltd, owner of the world-famous Rubik's Cube®.
• Expanding in Digital Gaming: The company entered the digital-toy segment through the acquisition of Toca Boca/Sago Mini in FY16 and reported more than 350 million of downloads, with more than 20 million of monthly active users and 120k active subscribers. The company is customer-focused with continual feedback and research. Furthermore, the company offers Flagship Digital Subscription for Pre-Schoolers kids with trusted content available across all major mobile platforms. We believe the digital gaming segment offers a lucrative opportunity of growth. As per study, millennial parents spend an average of 8.5 hours a week gaming, and nearly half of them say their child uses a video game regularly.

Source: Company Presentation

• Impressive Product presence with solid balance-sheet: The company sells its products across more than 100 markets is a Global Children’s Entertainment Company with a diversified Multi-Platform Portfolio. Moreover, the company holds a prominent position in Design and User Experience for Kids. Notably, the company is virtually debt-free.

Q3FY20 Financial Highlights:

• TOY announced its quarterly results, wherein the company posted higher revenue of USD 571.6 million, against USD 548.1 million in the previous corresponding period (pcp).
• The company posted a gross profit of USD 277.9 million, as compared to USD 286.9 million. The decline was majorly due to a higher cost of sales (USD 293.7 million versus USD 261.2 million in Q3FY19).
• Income before income tax expense stood at USD 101.5 million, lower than USD 125.2 million in pcp, due to higher administrative expenses and lower gross profit, partially offset by lower selling, marketing, distribution and product development expense.
• Net income stood at USD 86.8 million, as compared to USD 92.2 million in Q3FY19.        

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: A further breakout of COVID-19 may pose various risks to the group such as lower demand, supply chain disruption and labor shortage etc. All of these might impact the financial performance of the company.

Valuation Methodology (Illustrative): Price to CF based

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:

Spin Master has been expanding its presence across the Games category through acquisitions of new titles and innovative partnerships and collaborations. Moreover, with the new acquisition, the company is well-placed to capitalize its innovative product offerings to drive its future business. The lifting of restrictions is lending support to the group’s multi-platform portfolio, including traditional toys, entertainment properties and digital toys. These are likely to drive the group’s revenue going forward. We have valued the stock using P/CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered industry (Leisure Products) median on NTM basis. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 29.95 on November 18, 2020.

TOY Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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