Canaccord Raises Price TargetCanaccord Genuity
March 6, 2017
Spin Master Corp.
Product innovation to drive growth;
Maintain BUY, Raising target price to C$39 (from C$37)
Investment recommendation
We are reiterating our BUY rating, and increasing our target price to C$39.00 (from C$37.00 previously), following our attendance at the Spin Master Investor Day, and ahead of Q4/16 earnings results.
Investment highlights
• Spin Master is scheduled to report its Q4/16 earnings results on Monday March 13th after market close. A conference call will be held the following day at 9:30am EST. The dial-in number is 1-866-231-8191. We are forecasting sales of $320 million, and adjusted EBITDA of $20 million, which is slightly below consensus of $21 million. As a reminder, the fourth quarter is typically seasonally slow, as the majority of holiday sales are recorded during the third quarter.
• At the Activities, games, puzzles and fun furniture division we are forecasting sales of $120 million, which is above Q4/15 sales of $100 million. We attribute this growth to increased distribution of Cardinal and other Spin Master products into Europe through the Editrice Giochi subsidiary.
• At the Remote control and interactive characters division we are forecasting sales of $80 million, which is above Q4/15 sales of $50 million. We attribute this growth mainly to the success of Hatchimals in the winter holiday season, which was widely recognized as the holiday seasons “must-have” new toy. We believe Spin Master is well positioned in 2017 to continue to benefit from the strong success of Hatchimals.
• At the Boys action and high-tech construction division we are forecasting sales of $32 million, which is below Q4/15 sales of $46 million. The bulk of our forecast decline within the segment is due to the strong contribution to Q4/15 sales from Star Wars related products, which were launched earlier in 2015 compared to 2016.
• At the Pre-school and girls division we are forecasting sales of $109 million, which is above Q4/15 sales of $91 million. We attribute this growth to sales of physical Paw Patrol products in the winter holiday season, as the brand has gained international traction in the last year (with more international growth expected in 2017) and has remained a growth property for the company in North America.
• In our view, Spin Master is well positioned to remain a key consolidator in the highly fragmented toy products industry. The company’s balance sheet is healthy, with net debt/EBITDA of only 0.5x. The company has commented it would prefer to remain under 1.5x net debt/EBITDA, but would leverage up to 2.5x if an accretive, transformational acquisition were to present itself. Therefore, we believe Spin Master has plenty of “dry-powder” available to continue its consolidation strategy.
Valuation
We are reiterating our BUY rating, and increasing our target price to C$39.00 (from C$37.00 previously). Our target price represents 13.0x our 2017 EBITDA estimate of $237 million, which is converted into Canadian dollars to account for the company's TSX listed share price.