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 Rest of World.

Investment rationale

• Strong Surge in E-commerce Sale: The company saw strong demand from e-commerce channel. In Q2, the company generated approximately 25% of the total sales through e-commerce channels, and now the company is expecting this trend to be over 30% in the latter half of the year.

• Improved free cash flows: In the latest quarter, the company managed to improve its free cash flows. Free cash flow for the quarter, including changes in working capital, was $40.2 million compared to negative USD 34.7 million, a nearly USD 75 million improvement.

• Debt Free Balance Sheet: the company is not constrained to debt obligations and covenants, which can be burdensome during financial downturns. The company enjoys financial flexibility and independence. Its current cash position of USD 410.8 million is sufficient enough to meet near-term liabilities, placing it in a financially robust position in the time of uncertainty.

• The company, in association with Nickelodeon Movies and Paramount Pictures, is producing an animated movie for its popular entertainment franchise, PAW Patrol. This is scheduled to release in next year on August 20.

• Solid Stock Price Recovery: The stock recovered reasonably from the free fall it witnessed in the month of March 2020. The stock soared approximately 3x from its year’s bottom and outperformed the benchmark index on a YTD, 1-Month and 5-day basis, which implies a relative price strength in the stock.

Q2FY20: Financial Overview

Source: Company

• The company has shown an improvement in the revenues to USD 281.1 million in Q2-2020, up by 24% on Q-o-Q basis.
• Adjusted EBITDA numbers have shown a big positive change, from USD (32.3) million to USD 21.5 million in this quarter. This reflects that the operating expenses had been handled efficiently.
• Losses have been narrowed to USD (0.15) per share for this quarter from USD (0.26) per share in the previous quarter.

Upcoming Event

The company will be reporting their Third Quarter 2020 Financial Results on November 11, 2020.

Risks involved in investments

A further outbreak 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.

Valuations Methodology (Illustrative): EV to Sales

All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation

The unlocking process post the mandatory lockdowns are lending support to the group’s business, and the company’s multi-platform portfolio, including traditional toys, entertainment properties, and digital toys are likely to drive revenues in the coming quarters.

Also, the company’s financials are improving gradually, with substantial growth reported in the top-line, and narrowing losses on Q-o-Q basis. With a healthy balance sheet with USD 410.8 million in cash and cash equivalents, negligible debt, and improving free cash flows reflects the strength of the company.

Therefore, based on the above rationale and valuation, we have given a “Buy” rating at the closing price of CAD 29.85 on October 22, 2020. We have considered Fortuna Corus Entertainment Inc, Great Canadian Gaming Corp, Quebecor Inc etc. as the peer group for the comparison.

1-Year Price Chart (as on October 22, 2020, after the market close). Source: Refinitiv (Thomson Reuters)

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