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November 3, 2021
Outperform
TSX: TOY; CAD 41.90
Price Target CAD 61.00 ↑ 59.00
Spin Master Corp. Strong Q3 results, with more to come
Our view: Following the strong Q3 results and the upward revision to GPS/ revenue guidance, we maintain our constructive view on Spin Master Corp. Revising price target +$2 to $61 and reiterate our Outperform rating.
Key points:
Q3 results were well ahead of RBC and consensus forecasts, reflecting better-than-expected top-line contribution from all segments and an Adjusted EBITDA margin that also exceeded RBC/consensus expectations. Similar to the trends we noted during Hasbro and Mattel's recent Q3 reporting, Spin Master has also been able to effectively manage through inflationary pressures and supply chain disruptions. The company has also revised full-year guidance higher to reflect the strong results to-date. The full-year Gross Product Sales ("GPS") and revenue guidance were revised higher, while the Adjusted EBITDA margin guidance was reiterated (we have revised our full-year Adjusted EBITDA forecast to $360MM vs. our estimate of $343MM prior to Q3 reporting). See Exhibit 2 for guidance revision details. With regard to the balance sheet, the company is also deploying capital in a creative manner with the recent announcement to establish Spin Master Ventures, which will be initially seeded with $100MM of capital (see our SPARC and initial thoughts on the new platform here).
Good Q3 results across the board – Relative to our forecasts, higher-than- expected GPS, Other Revenue, and Gross Margin %, combined with lower- than-expected SG&A as a percentage of sales, drove Adjusted EBITDA of $217.3MM (+55% YoY), well ahead of RBC/consensus of $168MM/ $165MM. Global POS was +7% YoY, reflecting U.S. POS of +10% YoY (indicating that the company gained market share in the U.S.) and International POS (excluding U.S.) was +1%.
Pre-School segment (Paw Patrol) results ahead of forecasts – Pre-School segment GPS was $311MM (+28% YoY) vs. RBC forecast of $274MM. Q3 Global POS for Paw Patrol was +22% YoY, while U.S. POS was +31% YoY. Earlier today, Spin Master announced that it is currently producing a second feature film, Paw Patrol: The Mighty Movie, slated for release in October 2023. For context, Paw Patrol: The Movie has grossed $40MM domestically and $135MM+ worldwide, ranking it as the sixth highest grossing animated family film YTD.
"Other Revenue" becoming more meaningful – Q3 Other Revenue was $107MM (+121% YoY), well above RBC forecast of $75MM, with Digital games and Entertainment & Licensing revenue each contributing 50% to the mix. The Digital games business has grown significantly over the last year with revenues increasing +93% YoY to $54MM in Q3. This reflected 71% YoY growth in Toca Boca Monthly Active Users ("MAU") to 65MM, which includes 47MM MAU for Toca Life World, and +42% YoY growth in Sago Active Subscribers to 305K
