CIBC UpgradeEQUITY RESEARCH
April 29, 2022 Transferring Coverage
SPIN MASTER CORP.
Sky Is The Limit: Chasing A More Appropriate Valuation
Our Conclusion
Consumer discretionary names are out of fashion but TOY offers investors
attractive profitability, an intriguing growth driver through digital, and a
sterling balance sheet at a compelling valuation. Execution risks are ever
present in this industry, but TOY’s performance has been admirable since
the pandemic, continually exceeding expectations by a significant margin.
Capital deployment (through M&A, a dividend or SIB) could add to total
shareholder returns, and increased attention to the sector through peers HAS
and MAT could lift valuation. As of April 29, we transfer coverage of Spin
Master, maintaining our Outperformer rating and increasing our price target
to C$62 (from C$55) on higher EBITDA estimates and a 9.5x multiple.
Key Points
Balance Sheet Provides M&A, Capital Returns Optionality: TOY requires
minimal capital, so its ~$575MM net cash position provides opportunities.
Traditionally, M&A targets have included IP needing a refresh, but the current
cash position could indicate more transformative deals. TOY’s current
valuation makes accretion more difficult, but revenue synergies in the TOY
ecosystem (digital + entertainment) may convince investors that paying up is
worth it. On capital returns, a recurring dividend could be in the cards, as
could an SIB. The stock’s illiquid nature probably makes an NCIB less likely.
Investor Day To Add Clarity, But May Not Shift Sentiment: We support
TOY’s plan to add disclosure to the business, particularly operating margins
by the creative centre. That being said, similar increases to disclosure have
not meaningfully benefited Hasbro. We expect primary catalysts for TOY will
involve continued execution (exceeding and increasing guidance) and the
ongoing shift towards higher-margin, higher-growth categories like Digital.
Even if the added details do not impress investors, we are drawn to the
quality and potential of the digital business. If TOY’s digital sales can match
Hasbro’s (as a % of total sales), that could add ~20% to EBITDA.
Topical Sector May Lift Valuations: Mattel is reported to be a takeout
target from private equity, while Hasbro faces pressure from an activist
investor to spin off its digital division. A greater focus on the sector, with its
strong cash flow generation, growth opportunities in digital toys/games and
recession-resistance, may mean TOY receives a higher multiple. We
examine a sum-of-the-parts analysis herein, but we do not expect a spin-off,
as we believe digital operations function better when owning content
creation.
Negative Sentiment Against Discretionary Biggest Downside:
Discretionary names have been shunned by investors, almost irrespective of
quality, valuation, or recent operations. We understand this aversion in an
environment with unknowns regarding consumer behaviour and supply chain
integrity, but believe investors are too pessimistic on TOY’s business given
performance through the pandemic and potential growth levers