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Spin Master Corp.
(TOY-T) C$43.62
Q2/22 Preview: Cheap Relative Valuation and Too Much Cash
Event
Spin Master ("Spin") will report Q2/22 results after-market on July 27.
Impact: NEUTRAL
Q2/22 Preview: We anticipate record quarterly results for Q2/22, inclusive of attractive y/y double-digit adjusted EBITDA/EPS growth. We attribute this largely to the outlook for revenue growth as the combination of clean inventory exiting 2021 and a pull-forward of wholesale sales due to supply-chain concerns should complement the theme of reopening and digital games/third-party licensing growth. We forecast that pricing power, mix shift, and scale will mitigate inflationary pressure and sustain an attractive EBITDA margin performance by historical Q2 standards.
Outlook: We believe that the Q2/22 results should place Spin in a position to meet/ exceed its 2022 annual guidance. Although shifts in POS trends appear to be taking place, we maintain that the toy industry in general is relatively inelastic to downturns in the economy. With a growing portfolio of digital games/entertainment content in 2023, we believe that Spin will once again grow in excess of the industry that we believe should warrant a narrowing of the valuation discount relative to its peers. In addition, the current market/economic environment could lead to heightened growth through M&A under the presumption that valuations have likely declined in recent months.
Financial Position: In the absence of a material acquisition, we believe the Board will need to evaluate its substantial and growing net cash position. We believe the odds of a return of capital to shareholders have increased.
Investment Thesis: Despite ongoing record financial performance and the accumulation of material net cash resources (~$500mm), Spin continues to trade within a range and at a discount to its key peers. With recent disclosure illustrating the significance of the contribution from its high-margin/high-multiple digital games and entertainment segments, we expect this gap to narrow. We believe that forthcoming attractive growth through 2023 in these segments and allocation of its surplus cash resources could act as near-term catalysts to the share price.
TD Investment Conclusion
We are maintaining our ACTION LIST BUY rating and C$65.00 target price.
