CIBC ReportEQUITY RESEARCH
May 5, 2022 Earnings Update
SPIN MASTER CORP.
PAWsitive Outlook: Encouraging Investor Day & Start To 2022
Our Conclusion
Our primary takeaway from today’s investor day is that TOY’s IP and content
pipeline can generate compelling multi-year growth. Medium-term guidance
was mid-to-high single digits gross product sales growth, and a longer-term
goal of getting Digital to 20% of revenue (vs. 8% in Q1). This should make
high-single-digit consolidated revenue growth possible, vs. consensus of 5%
for 2023. Qualitatively, highlights of the day were the collaboration evident
within the company’s divisions, demonstration of management depth, and the
clear white space for Digital. Sentiment for discretionary remains negative,
but it’s hard to find any weakness with TOY’s business. In our opinion,
execution and increased disclosure make this stock a high-quality, defensive
name. We increase our price target to C$63 and TOY is Outperformer-rated.
Key Points
Credible Monetization Strategy Of PAW Patrol Franchise. TOY’s most
important property will be leveraged over the next few years in the form of
spin-off series and one-off specials. We believe TOY has struck an
appropriate balance of expansion without saturation on this asset. While we
believe the company will eventually need another crown jewel, we see no
risk of a slowdown from the profit-generating pups.
Ecosystem Strategy Is Clearly Working. The Q1 revenue beat helped
demonstrate the current success of the company’s strategy. TOY is
outperforming the industry at point-of-sale globally and in the key U.S.
market. This is particularly important as there is a risk the overall industry
softens after two years of outsize growth. Today, TOY shared that its 12
priority brands have gained, on average, 40 bps of market share since Q3.
Margin Communication Reveals Healthy Core Toy Business. Profitability
disclosure revealed a much more lucrative core Toy category than previously
imagined, and a mid-teens EBITDA margin in a seasonally softer quarter is
quite attractive. It’s clear the company has righted its distribution centre
challenges from years ago which, in our view, has de-risked the stock.
Potential Upside To Guidance. Although revenue guidance was increased,
the expectation of a flat EBITDA margin Y/Y leads us to believe there’s
upside to 2022 profitability. Management conceded they wish to be
conservative, but we expect EBITDA guidance will, ultimately, be increased.
Other Observations From Investor Day. We have increased confidence in
the strategy of entertainment serving as a funnel for the other two creative
centres. Interaction and cross-group synergies were evident, as was TOY’s
bench strength. The most intriguing growth vector is Digital. An 11% industry
CAGR (TOY can likely outperform) combined with >35%% EBIT margins
makes for a rewarding outcome. Toca Life World may not be as well known
domestically, but its 56MM member base show it clearly has traction