TSX:TOY - Post Discussion
Post by
retiredcf on Jun 30, 2022 9:03am
RBC
June 29, 2022
Spin Master Corp.
Key takeaways from investor meetings
TSX: TOY | CAD 41.50 | Outperform | Price Target CAD 65.00
Sentiment: Neutral
Our View — We hosted Spin Master management for in-person investor meetings. In attendance were Max Rangel (President & CEO) and Mark Segal (EVP and CFO). Topics in focus during the meetings included: 1) how Mr. Rangel views/manages Spin Master's business and his areas of focus during his first year with the company (most investors were meeting him for the first time); 2) strategy/outlook for the Digital Games business; 3) outlook for Entertainment and Toys platforms over the coming years; and, 4) capital allocation plans, and more specifically, the outlook for M&A. Overall, we were encouraged by the commentary on how the company plans to leverage its 3 platforms (toys, digital, entertainment) to drive sustainable growth over the coming years, and its M&A strategy (more on this below).
Thoughts on M&A — Spin Master's capital allocation priorities include internal investments and M&A. Within Digital Games, management's focus for M&A includes: 1) IP that is underutilized and can be maximized in another form; 2) strong teams/talent; and, 3) larger companies with more established revenue profiles. Management indicated that the Digital Games space is relatively more attractive for M&A compared to Toys and Entertainment as it offers higher growth rates, lower penetration, and high margin potential. Within the toys space, the focus for M&A includes: 1) quality IP; 2) ability to innovate around that IP; 3) ability to expand/ grow that IP using Spin Master's international platform; and, 4) accretive margin profile. We estimate the company has capacity to do a ~$1.5 billion acquisition without needing to issue equity. As of Q1 2022, TOY had $493MM of cash on hand (-1.0x net debt/LTM EBITDA) and $510MM of available financing through its revolving credit facility. Going forward, management noted that they would be comfortable with leverage levels of 1.0x-1.5x; however, they would be willing to increase leverage to ~3x for a transformational acquisition (provided that the company can de-lever quickly thereafter).
Digital opportunities — Management noted that they intend to grow the Digital Games segment via the introduction of new apps (new-to-market and those leveraging existing IP), and to expand the company’s targeted age range beyond what is addressed by Toca Boca and Sago Mini (i.e. a Digital game based on the Rubik's Cube IP). Although the company is still exploring monetization models, management highlighted that a Rubik's game could potentially be subscription-based while also having in-app purchases (advertising-based models likely not of interest at this point). Another opportunity highlighted was a Paw Patrol based app, which could be introduced over the next 1-2 years. Going forward, Spin Master is looking to grow Digital Games to ~20% of total revenue over time, with EBIT margins in the 35%-40% range. For more on the Digital Games segment, see our note following Investor Day here.
Entertainment pipeline remains strong; Targeting +15%-16% Adj. EBITDA margin for Toys — In 2023, the company will be launching PAW Patrol: The Mighty Movie as a follow up to the first PAW Patrol movie, as well as Rubble & Crew, a new PAW Patrol spin-off series. Additional content launches include Vida the Vet in 2023, and a show based on the Sago Mini IP. Management highlighted how the Entertainment segment serves as Spin Master’s content/IP creation engine and also provides IP for the company’s other two business lines (Toys and Digital Games). While the Entertainment segment contribution may "ebb and flow" based on content releases, we expect Toys based evenue to be more consistent. Management spent some time highlighting how they manage the portfolio to drive balanced growth and the heightened focus on ensuring that they "comp" well against big growth years. For the Toys platform, management targets an Adjusted EBITDA margin the +15%-16% range.
Inflation has been manageable — While the higher input/freight costs have been a headwind, the company has successfully leveraged higher pricing as well as improved mix shift (increased contribution from Digital) to navigate through the challenging supply chain/inflationary environment (i.e. ensure flat/growing margins for 2021 and 2022E).
Be the first to comment on this post