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. 

Management Updates:

On December 14, 2020, the company announced the appointment of Max Rangel as the Global President with effect from January 2021.

Key Updates:

• Enhanced its Agreement with Warner Bros. Consumer Products: Recently, the company informed a global licensing agreement with Warner Bros. Consumer Products as the new toy licensee for the Wizarding World franchise. Under the contract, the company would develop Wizarding World products based on the Harry Potter and Fantastic Beastsfilms, including dolls. The products are expected to be launched in 2021. With the above agreements, the company would enhance its franchise presence across the Harry Potter and Fantastic Beasts segment. The above collaboration would help the company to enter to the growing market for the above comic characters, which includes kids and fans of all ages around the globe.
• Solid Product portfolio: The group distributes its products across more than 100 markets, and has a leading presence in the Global Children’s Entertainment Company. Moreover, the company is targeting to improve its international business from current ~39% to ~45% through building distributor’s networks across the markets where the company does not have an established presence. The Management also targeting to increasing business with current distributors, which also augurs well for organic growth.              

Source: Company Presentations

Q3FY20 Financial Highlights:

• TOY declared its quarterly results, wherein the company posted improved revenue of USD 571.6 million, as compared to USD 548.1 million in the previous corresponding period (pcp). The decline was primarily attributable to lower revenue from North America and Rest of World segments, partially offset by higher Europe revenues.
• Gross profit stood at USD 277.9 million, declined from USD 286.9 million in Q3FY19. The decline was majorly due to a higher cost of sales amounting USD 293.7 million, as compared to USD 261.2 million in pcp.
• The quarter was marked by a higher administrative expense (USD 67 million, versus USD 55.5 million) and mildly higher depreciation and amortization expenses (USD 9.5 million versus USD 9.00 million in Q3FY19). However, selling, marketing, distribution and product development recorded a decline to USD 92.2 million, versus USD 98.4 million in pcp. Income before income tax expense slide to USD 101.5 million, versus USD 125.2 million in pcp.
• Net income stood at USD 86.8 million, as compared to USD 92.2 million in Q3FY19.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risk: Change in consumer preference might take a toll on the demand dynamics. Moreover, the group has to constantly look for innovations to stay competitive within the industry.

Valuation Methodology (Illustrative): Price to Earnings Flow

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation:

The company would Leverage Global Platform Through Strategic Acquisitions. The company has reported a 20% a CAGR growth in its gross product sales during the period of FY13 to FY19, which denotes improved demand dynamics. Moreover, the company’s adjusted EBITDA grew at a CAGR of ~27% at the same time, indicates operational resiliency. We have valued the stock using P/CF-based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered industry (Leisure Products) median on NTM basis etc. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 29.1 on December 18, 2020.

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

CAE Inc

CAE Inc (TSX: CAE) is a Canada-based professional and business education company, primarily focused on delivering training for the civil aviation, defense, security, and healthcare markets. Multiple types of simulators and synthetic exercises may be sold to customers to serve as alternatives for live-training experiences.

Management Updates:

On December 10, 2020, the company informed the appointment of Ben Nicholson as the Vice President Washington Operations, with effect from December 14, 2020.

Key Updates:

• Lowering Debt levels: The company has a manageable debt profile with long-term debt stands at CAD 2,387.4 million, down from CAD 3,106 million reported at the end of FY20, which implies reducing balance sheet risks. The company paid CAD 555.4 million of borrowings under revolving credit facilities during the first half of FY21. As a result, we expect a reduction in the finance expense in the foreseeable future which would further support the company’s profitability.
• Improved Guidance: The company expects an improved second half FY20 results, as compared to the first half, driven by lifting of ban on travel restrictions, which would support the group’s performance in coming quarters. Moreover, the company also improved its financial strengths through annual recurring cost savings of approximately CAD 50 million and a reduction of its capital expenditures amounting CAD 100 million.

Q2FY21: Financial Highlights:

• CAE announced its quarterly results, wherein the company posted revenue of CAD 704.7 million, reflecting a decline of 21% on y-o-y basis. The decline was due to a lower income generated from both products and training & services.
• Gross profit stood at CAD 191 million, down from CAD 236.7 million in Q2FY20, due to lower revenue, partially supported by a lower cost of sales.
• Operating profit plunged CAD 28.2 million, from CAD 124.8 million in the previous corresponding period (pcp). The decline was due to a lower gross profit coupled with inclusion of restructuring costs amounting CAD 51.1 million.
• The company posted a net loss of CAD 6 million, as compared to a net income of CAD 75 million in the previous corresponding period (pcp).
• Cash and cash equivalents stood at CAD 258 million, while total assets stood at CAD 7,441.6 million.

Q2FY21 Income Statement Highlights: (Source: Company Reports)

Risk: The company derives a significant part of the revenue from the aviation industry, and due sluggishness in the aviation sector, demand for the training programs might take a back seat.

Valuation Methodology (Illustrative): EV to Sales 

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock Recommendation:

The group’s performance in the second quarter of FY21 was lower against the year-over period as the company provides training services to the civil, defense and healthcare sector and sluggishness in the aviation sector due to COVID-19 pandemic had a weigh on the group’s performances. However, on the other hand, the Management remains positive on the healthcare segment driven by continuing simulation from the sector. The long-term outlook from the civil and defense sectors remains positive, and we expect a gradual recovery in the aviation sector, which would support the company’s overall performance in coming quarters. We have valued the stock using EV to Sales based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like Air Lease Corp, Franklin Covey Co etc. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 33.49 on December 18, 2020.    

1-Year Price Chart (as on December 18, 2020). Source: Refinitiv (Thomson Reuters)

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.