Spin Master Corp

Spin Master Corp (TSX: TOY) is a Canada-based children’s entertainment company. The Company creates, designs, manufactures, and markets a portfolio of toys, games, products, and entertainment properties.

Key Highlights

• Significant reduction in debt, with Debt/Equity ratio stood at 0.9x at the end of the March 2021 from 0.60x at the end of March 2020. This was supported by significant growth in the cash flow over the past one year.
• Solid liquidity profile, with current ratio stood at 2.12x at the end of March 2021, higher than the industry median of 1.8x and improved significantly on a sequential quarter basis, from 1.95x at the end of December 2020.
• TOY shares are hovering in a steep bullish trend with stock traded well above the crucial long-term as well as short-term support levels of 50-day and 200-day SMAs. Also, moving averages are rising, which is a positive indicator.
• The leading momentum indicator, the Moving Average Convergence Divergence (MACD) is rising, with the spread between short-length 12-day EMA and Long-length 26-day EMA is positive. This is a bullish indicator. Further, MACD oscillator is about to crossover 9-day SMA signal line.

Technical Price Chart (as on June 18, 2021), Analysis by Kalkine Group

Financial Highlights: Q1FY21

• Gross Product Sales were USD 294.7 million, an increase of USD 52.4 million or 21.6%.  Excluding the impact of foreign exchange, Gross Product Sales increased by USD 47.6 million or 19.6% to USD 289.8 million.
• Total revenue of USD 316.6 million increased by 39.3% from USD 227.3 million. In Constant Currency terms, total revenue increased by 36.9%
• Gross profit was USD 157.4 million, representing 49.7% of total revenue, compared to USD 90.8 million or 39.9%. The improvement in gross margin was driven by higher digital games net revenue and entertainment and licensing net revenue.
• Net income was USD 3.2 million or earnings per share of USD 0.03 (diluted) compared to a net loss of USD (26.7) million or loss per share of USD (0.26) 
  

Risk Associated to Investment:  Any change in the consumer taste and preference would affect the group’s financial performance. The company is exposed to currency translation risk as well.

Stock Recommendation: The company recorded strong performance in the first quarter of the 2021, led by 21.6% jump in the gross sales, and 39% surge in the sales. Also, the company has consistently reduced its debt position. Also, from the technical standpoint its shares are posing well for an upside movement, with stock registered a breakout on the daily price chart and moved above its crucial resistance of 50-day SMA and traded above it. On the valuation front, the stock is trading at a forward EV to Sales multiple of 1.6x compared to the industry average of 1.7x. Therefore, based on the above rationale, we recommend a “Hold” rating on the stock at the closing price of CAD 41.81 on June 18, 2021.

1-Year Price Chat (as on June 18, 2021), Analysis by Kalkine Group

Primo Water Corporation

Primo Water Corporation (TSX: PRMW) is a leading pure-play water solutions provider in North America, Europe and Israel. The company’s water solutions ecosystem is anchored by an assortment of water dispensers and its water direct business, helping them generate approximately USD2.1 billion in annual revenue. 

Key highlights

• Upcoming quarter & Full Year 2021 Outlook: The management expects to clock the revenue in the range of USD 490-510 million with the adjusted EBITDA in a range of USD 90-95 million for Q2 2021. While for FY 2021, the group expects total organic revenue growth of 5%, which would deliver an Adjusted EBITDA in a range of USD 380-390 million.

Source: Company

• Expanding customer base: The group is concentrating on growing its client base in the residential to small and medium-sized business sectors. It plans to use its eCommerce capability to extend the customer base and maximize penetration. The organization hopes to enter this business segment by leveraging its deep direct-to-consumer distribution network, foreign sales and marketing activities, and strategic alliances.
• Higher Adjusted EBITDA: Adjusted EBITDA grew 8% to USD 76 million in the reporting quarter, compared to USD 70 million in the previous corresponding period. Increased demand for products and services from residential consumers, continuing operational leverage improvement, the heritage Primo acquisition, and synergy realization all contributed to the rise. The Adjusted EBITDA margin grew by 110 basis points to 15.9%.
• Rising cash from operations along free cash flows: In Q1 2021, the company generated higher cash provided by operating activities from continuing operations of USD 28.7 million compared to USD 4.7 million in the previous corresponding period, while the adjusted free cash flow stood at USD 8 million, against a negative adjusted free cash flow of USD 5 million in the prior year.

Financial overview of Q1 2021 (In millions of USD)

Source: Company

• In Q1 2021, the company posted revenue of USD 478.4 million, against USD 474.2 million in the previous corresponding period. The increase was driven mainly by the legacy Primo acquisition along with increased demand for products and services from residential customers.
• Gross profit for the reported period decreased 3% to USD 264.5 million, against USD 273.3 million in pcp. Gross margin stood at 55.3% compared to 57.6%, primarily due to lower volume driving higher per unit cost of sales.
• Operating income stood at USD 13.1 million in Q1 2021, compared to a loss of USD 4.0 million in pcp, on the back of lower SG&A expenses and lower acquisition and integration cost.
• Net loss from continuing operations minimized to USD 10.2 million compared to a loss of USD 27.4 million in pcp.

Risks associated with investments

Continued economic uncertainty can adversely affect the group’s customer’s financial condition, resulting in an inability to pay for its services or products and reduced or cancelled orders of the group’s services or products. Such adverse changes could lead to a slide in the company’s top line and bottom line.  

Valuation Methodology (Illustrative): EV to EBITDA

Stock recommendation

Despite a difficult operating environment and increased lockdown measures in many of the geographies the company serves, it generated good topline, adjusted EBITDA, and adjusted free cash flow growth. Furthermore, the group is concentrating on growing its client base in the residential to small and medium-sized business sectors. It plans to use its eCommerce capability to extend its customer base and maximize penetration. We believe this integrated digital strategy would allow them to seamless and improved consumer experience and long-term growth. Furthermore, with the positive momentum heading into the second quarter, coupled with the company’s key strategic initiatives support the management to increase their full year Adjusted EBITDA outlook by USD 10 million to between USD 380 million and USD 390 million. Therefore, based on the rationales discussed above and valuation, we recommend a “Hold” rating on the stock at the closing price of CAD 19.90 on June 18, 2021. We have considered National Beverage Corp, Embotelladora Andina SA, etc. as the peer group for the comparison.

One-Year Technical Price Chart (as on June 18, 2021). Analysis by Kalkine Group

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

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.