Spin Master Corp.

Spin Master Corp. (TSX: TOY) is Canada's leading children's entertainment company. The company has a strong portfolio of traditional and digital toys, games, products and entertainment properties. The company has well-recognized brands like PAW Patrol, Bakugan, Kinetic Sand, Air Hogs, Hatchimals and GUND, and is the toy licensee for other popular properties.

Q2FY20 Financial Highlights: Spin Master declared its quarterly results, wherein total revenue stood at USD 281.1 million, declined from USD 321 million in the previous corresponding period (pcp). The decline was primarily due to government-imposed restrictions and the closure of several retail stores during the period. Due to the pandemic, the business witnessed a soft demand across the major markets of the company, partially offset by stable order inflow from online and e-commerce channels. Gross profit dipped to USD 118.2 million, significantly lower than the previous corresponding period due to a lower income coupled with a higher cost of sales. The company reported a loss before income tax of USD 12.8 million, as compared to a profit of USD 13 million in the previous corresponding period, primarily attributable to a lower gross profit combined with higher finance expense and higher depreciation expense, partially offset by lower selling, marketing, distribution and product development expense. Net loss was posted at USD 14.9 million, as compared to a net income of USD 10.2 million in the previous corresponding period. The group ended the quarter with a cash balance of USD 410.8 million, while total assets stood at USD 1,375.6 million in pcp.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: A further outbreak of COVID-19 may pose a various risk to the group, such as lower demand, supply chain disruption, and labor shortage etc. All of these might impact the financial performance of the company.

Valuation Methodology: EV to Sales Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of TOY soared ~40% in the last three months, as the company resumed normal course of operations in the recent past. The company is a leading global children's entertainment company and has product presence across the globe. The company has a 36-month brand innovation pipeline, which is focused on internal innovation and multiple touchpoints with inventors, licensors, consumers and potential acquisitions and is likely to improve the company's business prospects in the coming days. Furthermore, the company continues to enhance its footprints across the traditional television, video-on-demand, subscription video-on-demand, as well as other short-form and long-form content, including movies, across a variety of distribution channels, which is impressive. The majority of the company's production (~65%) comes from China, and the company witnessed a logistics hiccups during the first quarter of FY20. However, with the opening up of the economy, the company witnessed normalized operations, which is a key positive.  The group is focusing on innovation using its global internal and external research and development network and also developing evergreen global entertainment and digital toys properties. The group will be focusing on increasing international sales in developed and emerging markets and would be leveraging the company's global platform through strategic acquisitions. We have valued the stock using EV to Sales based relative valuation method and have arrived at a target upside of low double digit (in percentage terms). For the said purposes, we have considered Hasbro Inc, Mattel Inc and Great Canadian Gaming Corp etc., as a peer group. Considering the aforesaid facts, current price levels, we recommend a 'Buy' rating on the stock at the closing market price of CAD 29.70 on September 8, 2020.

TOY Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Westshore Terminals Investment Corporation

Westshore Terminals Investment Corporation (TSX: WTE) operates a coal storage and loading terminal at Roberts Bank, British Columbia. The company derives its revenue from rates charged for loading coal onto seagoing vessels.

Recently, the company has entered into a new contract with Teck Coal Limited, following the expiry of their current contract on March 31, 2021. The new contract will provide for the shipment of between 5 million and 7 million tonnes of coal annually at fixed loading charges.

Q2FY20 Financial Highlights: Westshore announced its quarterly results, wherein the company posted revenue of CAD 96.816 million as compared to CAD 98.714 million in Q2FY19. The marginal decline was primarily attributed to a lower coal loading due to a fall in average loading rate at CAD 11.97 per tonne against CAD 12.80 per tonne in the previous corresponding period (pcp), partially offset by higher income from other segments. However, tonnage shipped, during the quarter, was marginally higher at 7.7 million tonnes against 7.6 million tonnes in the previous corresponding quarter. Coal loading revenue dipped by 5.2% to CAD 92 million as compared to CAD 97 million, a year ago. Total expenses were reported at CAD 48.007 million, slightly higher than CAD 47.566 million in pcp, due to a significantly higher administrative expense, partially offset by a lower operating expense. The company reported a profit for the period at CAD 34.653 million as compared to CAD 34.96 million in pcp, driven by lower lower net finance costs and an increase in foreign exchange gain.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The business might witness headwinds such as fall in global demand and competition in the supply of seaborne coal. Further, a reduction in the in the average loading rate would take a toll on the company’s performance.

Valuation Methodology: Price to CF Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock corrected ~13% so far this year amid volatility in the equity market. The Company expects its FY20 throughput volumes at 29.5 million tonnes, reflecting a stable volume looking at the current scenario. The business is considered as ‘essentials’ and hence continue to operate normally during the lockdown, and the group expect that the business is likely to remain stable in the coming years. The Company is well-positioned to handle a range of bulk commodities in addition to coal. The Company is focusing on attracting the interest of producers of other products and will evaluate the feasibility of the opportunities. Westshore has a CAD 40 million operating facility that is primarily used for a letter of credit related to pension funding and day to day operational liquidity, which is a prudent strategy.  The facility matures on August 30, 2022 and is secured by a pledge of all the assets of Westshore. We expect, the demand of the coal to remain stable considering the gradual opening up of the economy across the globe. We have valued the stock using P/CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Superior Plus Corp, TFI International Inc and CCL Industries Inc. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 16.52 on September 8, 2020.

WTE Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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