Spin Master Corp. (TSX: TOY) is a Canada-based children’s entertainment company. The group creates, designs, manufactures, licenses, and markets a diversified portfolio of toys, games, and entertainment properties across four key categories (outdoor, boys, preschool, and girls, and activities games and puzzles and plush).

Key Highlights:

• Increased revenue: For Q1FY22, the company reported an increase of almost 34% in its total revenue to USD 424.2 million against the total revenue of USD 316.6 million in Q1FY21. The major contribution was from Toy revenue segment which stated the sales of USD 350.9 million in the Q1FY22 vs USD 255.6 million in Q1FY21. The Digital Games sales were recorded at USD 51.1 million in Q1FY22 against USD 34.1 million in Q1FY21, whereas the revenue from the entertainment segment declined to USD 22.2 million in the Q1FY22 against USD 26.9 million in Q1FY21.

• Industry beating profitability margins: During Q1FY22, the company reported increased revenue across its two major segments which were duly supported by the increase in demand, and limiting the increase in the cost of sales, eventually supporting the company to outpace the profitability margins as compared to the industry median.

Source: Refinitiv, Analysis by Kalkine Group

• Improved outlook: The management raised the estimates for its Toy gross product sales to low double digits (against FY21) from the previous estimates of single-digit growth mentioned in February 2022. The seasonality of toy gross product sales for FY22 is expected to be around 40% in the first half of The group expects the adjusted EBITDA margin to be in line with FY21.

• Increased adjusted EBITDA: The company stated an increase in its adjusted EBITDA in Q1FY22 to USD 95.7 million as compared to USD 36.7 million in Q1FY21. Further, the adjusted EBITDA margin also rose to 22.6% for a similar period (Q1FY22) against the adjusted EBITDA margin of 11.6% in Q1FY21. This increase was majorly driven by higher gross profit and reduced distribution expenses which were partially offset by the higher administrative and selling expenses. 

Risks associated with investment

The company is majorly exposed to changes in demand from its customers,  disruption in the supply chain, decreased spending power, and rising cost pressure. Further, the lockdown restriction and closure of retail outlets can also hamper the company’s business to a great extent.  

Financial overview of Q1FY22 (Expressed in millions of USD)

Source: Company Filing 

• During Q1FY22, the group reported an increase in total revenue to USD 424.2 million as compared to USD 316.6 million in Q1FY21. The toy revenue segment witnessed a surge of 37.3% in its sales during Q1FY22 as compared to Q1FY21, the digital games saw a YoY increase of 49.9% in sales during Q1FY22.
• The gross profit for Q1FY22 increased to USD 237.3 million against USD 157.4 million in Q1FY21.
• The operating income saw a significant increase in Q1FY22 to USD 61.7 million as compared to USD 6.7 million in Q1FY21.
• The group reported a net income of USD 45.6 million in Q1FY22 against the net income of USD 3.2 million in Q1FY21.

Valuation Methodology (Illustrative): EV to Sales based

Analysis by Kalkine Group

Stock Recommendation:

During Q1FY22, the company reported an increase in the adjusted EBITDA to USD 95.7 million against USD 36.7 million in Q1FY21, along with an increased net income of USD 45.6 million in Q1FY22 vs net income of USD 3.2 million in Q1FY21. The positive outlook shared by the management, where the toy gross product sales are revised from single-digit to lower double digits in FY22, along with maintaining the adjusted EBITDA margin, especially in the rising inflationary environment, represents the optimistic outlook of the company for FY22. On the valuation front, the stock is measured on the EV to Sales based, where the stock is trading at a multiple of 1.2x against the industry (consumer cyclicals) average of 1.8x, implying that the stock is undervalued and has headroom to catch up with its peers. We have considered Acushnet Holdings Corp., Latham Group Inc., etc as the peer group for the comparison.

Therefore, based on the above rationale and valuation, we recommend a “Hold” rating on the stock at the last closing price of CAD 45.15 on May 13, 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 of May 13, 2022). Analysis by Kalkine Group

Note- The reference data has been partly sourced from REFINITV

Disclaimer

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