Spin Master Corp. (TSX: TOY) is a leading global children's entertainment company, creating exceptional play experiences through Toys, Entertainment and Digital Games. The company has an impressive distribution network across over 100 countries. The Group is best known for award-winning brands PAW Patrol®, Bakugan®, Kinetic Sand®, Air Hogs®, Hatchimals®, Rubik’s Cube® and GUND®, and is the global toy licensee for other popular properties.

Key Updates:

• Strong growth from the Toy segment: Revenue from the toy segment increased by USD 95.3 million or 37.3% to USD 350.9 million in Q1FY22, driven by growth in all product categories, particularly Preschool and Dolls & Interactive and Wheels & Action segments. Toy Gross Product Sales increased by USD 102.8 million or 34.9%, to USD 397.5 million from USD 294.7 million in pcp. The improvement was led by growth from Gabby's Dollhouse, DC Comics and Wizarding World, and reflected strong customer demand. Moreover, the company’s successful strategies to combat recent global supply chain volatility also supported the sales growth.

Q1FY22 Revenue Highlights (Source: Company Reports)

• Industry Beating Margins: In Q1FY22, the company reported its gross profit margin and EBITDA margin of 55.9% and 21.3%, respectively, as compared to the industry median of 38.4% and 14.7%, respectively. This indicates a better cost-management when compared to the industry median. Moreover, the company reported its net margin of 10.7% in Q1FY22, as compared to the industry median of 7.5%.

• Decline in cash conversion period: In Q1FY22, the company’s cash conversion period stood at 39.8 days, which is significantly lower than the industry median of 108.6 days. This is impressive and indicates that the company takes lower time to convert its investments to cash flows when compared to the industry median.
  

Risks Associated with the investment:

Change in consumer preference might dampen the demand scenario. Moreover, any adverse economic condition might take a toll on the Company’s cash flows due to lower demand for the products.

Financials Highlights: Q1 FY22

Q1FY22 Income Statement Highlights (Source: Company Reports)

• TOY declared its quarterly result, wherein the company posted higher revenue of USD 2 million, v/s USD 316.6 million in pcp. The growth in revenue was driven by growth in all product categories, particularly Preschool and Dolls & Interactive segment.
• Gross profit surged to USD 3 million from USD 157.4 million in pcp. The increase was majorly due to a higher income, partially offset by a rise in the higher cost of sales.
• The quarter was marked by a higher administrative expense while supported by lower depreciation and amortization expenses. Net foreign exchange loss was reported at USD 9.6 million, as compared to a loss of USD 3.7 million in pcp. Additionally, finance costs stood lower at USD 1.9 million, as compared to USD 2.5 million in pcp.
• The company reported a net income of USD 6 million, soared from USD 3.2million in pcp, due to the above-mentioned reasons, partially offset by an income tax expense.
  

Valuation Methodology (Illustrative): Price to Earnings Based

Analysis by Kalkine Group

Stock Recommendation: 

The company reported a lower D/E ratio of 0.07x in Q1FY22, as compared to the industry median of 0.30x. This indicates improved financial flexibility and prudent capital management. Moreover, long-term debt to total capital stood at 5.2% in Q1FY22, significantly lower than the industry median of 17.3%, indicating lower balance sheet risks. We have valued the stock using the price to earnings-based relative valuation approach and arrived at a target price offering single-digit upside potential (in % terms). We have considered peers like BRP Inc, Vista Outdoor Inc etc. Hence considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of TOY at the last closing price of CAD 45.43 on June 06, 2022.

One-Year Technical Price Chart (as on June 06, 2022). Source: REFINITIV, Analysis by Kalkine Group

Note: The reference data has been partly sourced from REFINITIV

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