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:

• Surge in Cash flows: The company reported a higher cash from operations during the first half of FY21, supported by a net profit of USD 36.7 million, as compared to a loss of USD 41.6 million, a year ago. Notably, cash from operations jumped to USD 103.2 million in in H1FY21, from USD 55.4 million in pcp. A higher cash flow is encouraging, as it enhances the overall liquidity position of the firm.
• Growing traction from the digital-games segment: .The Company has an established digital games presence, which is supported by the Toca Boca and Sago Mini brands and has more than 50 million monthly active users. The digital games industry has grown consistently over the years, and we believe the momentum to continue supported by growing 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.

Source: Company Presentation

• Better liquidity position than industry: As of Q2FY21, the company reported improved current ratio and quick ratio of 1.63x and 2.00x, respectively, which is higher than the industry median of 1.49x and 1.97x. The above indicates that the company is managing its liquid assets better than its peers. Moreover, cash cycle days stood at 46 days, as compared to the industry median of 57.7 days, which indicates that the company is taking lower time to convert its resource into cash as compared to its peers.

Q2FY21 Financial Highlights:

• TOY declared its quarterly results, wherein the company posted improved revenue of USD 8 million, v/s USD 281.1 million in the previous corresponding period (pcp). The growth was supported by strong growth from North America and the European geographies.
• Gross profit surged to USD 9 million, from USD 118.2 million in Q2FY20. The increase was majorly due to a higher income, partially offset by a slightly higher cost of sales (USD 180.9 million v/s USD 162.9 million in pcp).
• The quarter was marked by a higher administrative expense (USD 5 million, v/s USD 55.2 million in pcp) and higher selling, marketing, distribution and product development costs (USD 71.6 million, v/s USD 59.6 million in pcp) remained as a drag.
• The company reported a net income of USD 5 million, as compared to a net loss of USD 14.9 million in Q2FY20.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: 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.

Valuation Methodology (Illustrative): Price to Earnings 

Stock Recommendation:

Spin Master is continuously enhancing its content within its traditional television, video-on-demand, subscription video-on demand, which is a key positive and would continue to attract targeted customers-base in the coming days. 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). Hence considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of TOY at the last closing price of CAD 43.29 on September 17, 2021.

One-Year Technical Price Chart (as on September 17, 2021). Source: REFINITIV, Analysis by Kalkine Group 

Intertape Polymer Group Inc.

Intertape Polymer Group Inc. (TSX: ITP) manufactures and sells a variety of packaging products. The firm's primary product categories include tapes, films, and woven coated fabrics. The company's tapes include pressure-sensitive and water-activated carton sealing tapes, and flatback, duct, double coated, foil, electrical, and filament tapes. 

Key Highlights:

• eCommerce segment to drive future growth: In the recent past, due to the growing traction from the eCommerce businesses across the globe, the company is witnessing solid growth from the above segments. The group reported growing demand for water-activated tape, protective packaging, dispensing machines etc., which are necessary for the eCommerce packaging. We believe, due to the ongoing pandemic, the demand for the above products is likely to remain healthy.
• Increase in dividend distribution: The company has reported a higher dividend distribution despite the ongoing sluggish economic growth. Notably, in H1FY21, the group reported total dividend of USD 18.451 million, as compared to USD 17.458 million in pcp.
• Improved financial metrics: In H1FY21, the company reported a solid growth in its Adjusted EBITDA, which stood at USD 125.9 million compared to USD 79.0 million in pcp. Moreover, adjusted net earnings surged to USD 62.5 million in H1FY21 from USD 25.9 million in pcp.

Q2FY21 Financial Highlights:

• ITP announced its quarterly result, wherein the company posted revenue of USD 376.686 million, as compared to USD 267.710 million in Q2FY20. The increase was driven by primarily due to organic growth within certain film, woven, and tape products, including strong momentum in products with significant e-commerce end-market exposure such as water-activated tape and dispensing machines.
• Gross profit stood at USD 89.284 million, increased from USD 57.087 million in the previous financial year.
• Operating profit was recorded at USD 42.299 million v/s USD 16.796 million in Q2FY20. The period was marked by higher selling, general and administrative expenses (USD 44.075 million v/s USD 34.534 million in pcp) coupled with a higher research expense (USD 2.910 million v/s USD 2.546 million in Q2FY20).
• Net earnings stood at USD 14.723 million, marginally higher than USD 14.581 million in the previous year.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: The company’s operations might be impacted due to change in consumer preference which subsequently resulted in unfavorable revenue mix, which would dampen the company’s margins and profitability. Disruption in logistics due to further imposition of restriction would hurt the company’s operations.

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendation:

For FY21, the company expects its revenue in between USD 1.425 billion to 1.5 billion, while adjusted EBITDA is expected in between USD 245 to USD 255 million. Free cash flow is anticipated in between USD 70 to USD 80 billion, while capital expenditure during the period is estimated at USD 100 million.  We have valued the stock using the Price to Earnings based relative valuation method and have arrived at a single-digit upside (in percentage terms). Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 29.22 on September 17, 2021.

One-Year Technical Price Chart (as on September 17, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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