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:

• Growing Traction from Digital Segment: The company offers innovative offerings for children. In the recent past, due to the growing demand for the digital games segment, the group entered into the segment with the brands like Toca Boca and Sago Mini. Notably, the company has more than 50 million monthly active users in the above segment. Revenue from the digital segment stood at USD 77 million in FY20, reflecting more than threefold jump over FY18. The segment grew drastically in the recent past, supported by overwhelming demand from more than 100 countries. After Q1FY21, the digital revenue segment reported a sale of USD 34.1 million, reflecting a whopping 394.2% jump over Q1FY20.         

• Ample Liquidity to support future operations: At the end of Q1FY21, the company has liquidity of USD 779.8 million, which includes USD 262.3 million in cash and USD 517.5 million under its credit facilities. The management believes that the above funds are sufficient to meet its working capital and other capital investments.

Q1FY21 Financial Highlights:

• TOY declared its quarterly results, wherein the company posted improved revenue of USD 316.6 million v/s USD 227.3 million in the previous corresponding period (pcp). The 39% y-o-y increase was driven by significantly higher revenue from the Preschool and Girls segment and Outdoor segments. Moreover, higher Entertainment and Licensing revenue and Digital games revenue supported the topline.

Segment Highlights (Source: Company Reports)

• Gross profit surged to USD 157.4 million from USD 90.8 million in Q1FY20. The increase was majorly due to a higher income, partially offset by a slightly higher cost of sales (USD 159.2 million v/s USD 136.5 million in pcp).
• The quarter was marked by higher administrative expenses (USD 69.0 million, v/s USD 65.7 million in pcp), which was offset by lower depreciation and amortization expenses (USD 8.9 million v/s USD 9.2 million in Q1FY20) coupled with a slide in selling, marketing, distribution and product development costs (USD 69.9 million, v/s USD 80.9 million in pcp).
• The company reported a net income of USD 3.2 million as compared to a net loss of USD 26.7 million in Q1FY20.
• The group reported its cash balance at USD 262.3 million, while total assets were recorded at USD 1,267.2 million.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risk: 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 based

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

Stock Recommendation:

For FY21, the company expects its revenue to record growth of low double-digits over FY20. Moreover, TOY expects its FY21 Adjusted EBITDA Margin to be at the high end of the mid to high teens range. We have valued the stock using Price to Earnings based relative valuation approach and arrived at a target price offering single-digit upside potential (in % terms). We have considered peers like Mattel Inc, Funko Inc etc. Hence considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the last closing price of CAD 43.19 on May 18, 2021.

One-Year Price Chart (as on May 18, 2021). Source: Refinitiv (Thomson Reuters)

Park Lawn Corporation

Park Lawn Corporation (TSX: PLC), provides goods and services associated with the disposition and memorialization of human remains. The Company's products and services are sold on a pre-planned basis (pre-need) or at the time of a death (at-need). The Company and its subsidiaries own and operate businesses, including cemeteries, crematoria, funeral homes, chapels, and a transfer service. 

Key highlights 

• Robust Q1 2021 performance: The company continued its solid performance in Q1 2021, which included significant growth in revenue, net earnings, Adjusted Net Earnings, Adjusted EBITDA, and Adjusted EBITDA margin.  As compared to Q1 2020, net revenue from comparable operations grew approximately 21% and Adjusted EBITDA margin increased 300 basis points to 27.2%, further demonstrating its commitment to improving upon existing operations and integrating the recent acquisitions.

Source: Company 

• The bullish stance of management: It is a progressive, growth-orientated company that delivers high quality products and services to meet the rapidly evolving needs of the North American market. Moreover, the group is optimistic about its operations, and the management expects healthy growth in Adjusted EBITDA through fiscal 2022. The company targets CAD 100 million of Adjusted EBITDA and margin of 26% in 2022.

Source: Company

• Favorable Age Demographics would help in generating revenue: The company is uniquely positioned to take advantage of favorable population demographics, driven by the aging of the population born between 1946 and 1964. The rise in ageing population would provide many opportunities for the company’s funeral homes and cemeteries for preneed sales and planning.

Source: Company

• Rising Cremation Rates: Since 2016, the number of families in North America choosing cremation has outnumbered those choosing traditional burial, primarily due to the growth of the nuclear family along with the decline of cultural traditions. Today, the group is operating in markets with high cremation rates (Toronto, New York, New Jersey, Colorado, and New Mexico), as well as low cremation rates (Mississippi, Kentucky, North and South Carolina).

Source: Company

• Industry beating margins: The company established a strong track record of growth. The company maintained healthy Gross Margin, EBITDA Margin and Net Margin in Q1 2021, compared to industry median, which is a key positive.

Source: Refinitiv (Thomson Reuters) 

Financial overview of Q1 2021 (Amount in CAD)

Source: company

• In Q1 2021 the company’s sales increased by 25.7% to CAD 89.6 million against CAD 71.3 million in Q1 2021. The increase in sales was primarily driven by growth in funeral and cemetery business along with the successful integration of completed acquisitions.
• Gross profit stood at CAD 75.3 million in the reported period against CAD 60.7 million in Q1 2020, based on high revenue generated.
• Net earnings increased massively by 1125% to CAD 9.8 million, against CAD 0.8 million in the previous corresponding period.

Risks associated with investment

Any change in regulations and government policies, liquidity, and interest rate could affect the company's operations and overall business.

Valuation Methodology (Illustrative): Price to Earnings\

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

Stock recommendation

The Company is improving its financial performance continuously. It clocked a CAGR of 48.6% in revenues during FY16-TTM Q1 2021 and a CAGR of 63% in Adjusted net earnings for the same period. The revenue from the core business improved along with the benefits from the successful integration of acquisitions made in the past. The group is also looking for new opportunities in the form of acquisitions. Furthermore, the management is confident in its business model and expects to garner an Adjusted EBITDA of CAD 100 million in FY2022. Therefore, based on the above rationales and valuation, we recommend a “Hold” rating at the closing price of CAD 32.84 on May 18, 2021. We have considered Savaria Corp, GDI Integrated Facility Services Inc, Carriage Services Inc, etc., as a peer group for the comparison.

One-Year Price Chart (as on May 18, 2021). 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.