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.

Key Updates:

• Strong demand dynamics: In FY21, the demand for the Toy segment remained strong across most of the markets in which the company operates. Notably, the company’s income stood at USD 2,042.4 million in FY21, significantly higher than USD 1,570.6 million in FY20 driven by strong traction from Toy segment (represents ~85% of the income), due to strong demand for the preschool and Dolls & Interactive products. Alongside, Entertainment and Licensing sales also grew 73.7% on y-o-y basis to USD 135.8 million. The management expects the above momentum to sustain in the FY22, wherein TOY expects its revenue to grow by mid to high single digits over 2021.

• Changing consumer preference for Digital-Games segment: The Company’s digital game reported a solid growth in revenue of USD 174.8 million in FY21, jumped from USD 76.8 million in FY20. Notably, this segment operates through renowned brands like Toca Boca, Sago Mini etc. and has more than 40 million monthly active users at the end of FY21. The digital games industry has grown consistently over the years, and we believe the momentum to continue supported by growing demand for mobile based games across the globe. Notably, the digital games segment is less seasonal when compared to conservative children's entertainment products, and hence, provides revenue stability.
  

• Industry Beating Margins: In FY21, the company reported its gross profit margin and EBITDA margin of 51.7% and 19.1%, respectively, as compared to the industry median of 41.8% and 17.4%, respectively. This indicates a better cost-management when compared to the industry median. Moreover, the company reported its pretax margin of 12.8% in FY21, as compared to the industry median of 11.7%.

• Result Update: The company will disclose its Q1FY22 results on May 04, 2022.

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.

FY21 Financial Highlights:

FY21 Income Statement Highlights (Source: Company Report)

• TOY declared its full-year results, wherein the company posted higher revenue of USD 2,042.4 million, v/s USD 1,570.6 million in FY20. The growth in revenue was driven by growth in all product categories, particularly Preschool and Dolls & Interactive.
• Gross profit surged to USD 1,056.6 million from USD 9 million in FY20. 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 (USD 5 million, v/s USD 632.4 million in FY20) while supported by lower depreciation and amortization expenses. Net foreign exchange was reported at USD 2.9 million, as compared to a loss of USD 27.6 million in FY20. Additionally, finance costs stood lower at USD 10.2 million, as compared to USD 12.1 million in FY20.
• The company reported a net income of USD 6 million, as compared to USD 45.5 million in FY20, due to the above-mentioned reasons.

Valuation Methodology (Illustrative): EV to Sales Based Methodology

Analysis by Kalkine Group

Stock Recommendation: 

The company has drastically lowered its cash conversion period from 69.8 days in FY20 to 29.2 days in FY21. A lower period denotes that the business is taking lower time to convert its investment to cash flows, which is a key positive. We have valued the stock using the EV to Sales-based relative valuation approach and arrived at a target price offering single-digit upside potential (in % terms). We have considered peers like Mattel 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 46.36 on April 18, 2022.

One-Year Technical Price Chart (as on April 18, 2022). Source: REFINITIV, Analysis by Kalkine Group

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