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July 28, 2022
Spin Master Corp. A good Q2 print; full year guidance reiterated
Our view: We maintain our positive view on Spin Master following Q2 results that were well ahead of expectations (full-year guidance reiterated). The company also initiated a dividend (~0.5% yield), which addresses recent questions on the use of cash (the balance sheet has been in a net cash positions for several years). Reiterate C$65 price target and Outperform rating.
Key points:
Thoughts exiting Q2 – Spin Master's Q2 outperformance reflected strong results in the Toys business, with segment revenue +34.1% YoY (well ahead of our forecast of +5.7% YoY) and H1 Toys POS +7% YoY (vs. +1% for the broader industry). The YoY growth was driven by earlier customer ordering (some pull-forward was also noted by peers during Q2 reporting) and strong demand. Favourable product mix, pricing, and lower admin expenses as a % of revenue, partially offset by inflation and ocean freight, drove segment Adjusted EBITDA margin higher YoY (19.0%; +452 bps YoY). Looking ahead, we expect continued POS momentum through H2 amidst a somewhat uncertain backdrop as the company navigates through supply chain and inflation-related headwinds. We expect investor focus through H2 to be on: 1) POS trends heading into the holiday period as investors contemplate the impact of economy-wide inflation on discretionary spending (although, in our view, spending on toys is less likely to be impacted than other "discretionary" categories); 2) supply chain outlook and product availability heading into the holiday season; 3) trends in the Digital Games segment (more on this below); and, 4) potential M&A (the company appears to be getting more proactive with its capital allocation strategy).
Digital Games in focus – In Q2, Digital Games revenue was $40.3MM (+9.2% YoY, +16.5% YoY in constant currency), below our forecast of $51.0MM. The YoY revenue increase was primarily driven by higher in- app purchases in Toca Life World. Additionally, Digital Games' Adjusted EBITDA margin was 28.5% (-13.7 p.p. YoY), reflecting higher development/ personnel/marketing costs as the company focuses on 2022/2023 launches and user acquisition. We see significant opportunity for growth over the medium- to long-term for this segment, driven by: 1) continued growth of the two existing platforms (Toca Boca/Sago Mini); 2) new launches based on new-to-market IP and apps based on existing Spin Master IP; 3) the significant TAM in the Digital Gaming space; and, 4) the opportunity to accelerate growth via M&A (both tuck-ins and larger transactions).
Q2 results ahead of forecasts – Spin Master reported revenue of $506.3MM, well ahead of RBC/consensus forecasts of $419.3MM/ $486.9MM, and Adjusted EBITDA that was well ahead of RBC/consensus expectations. The company reiterated its 2022 guidance for GPS, revenue, and Adjusted EBITDA (noting the GPS/revenue guide is now in constant currency). See Exhibit 1 inside for results details and Exhibit 4 for guidance
