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October 31, 2024
Outperform
TSX: TOY; CAD 29.47
Price Target CAD 43.00 ↓ 46.00
Spin Master Corp.
Factoring in a More Conservative EBITDA Trajectory; 2025 Outlook Remains Intact
Our view: Given the challenged macro environment, compressed holiday season, lower in-game purchases within Digital Games and with Q4/24 being the first fourth quarter with M&D, we have trimmed our 2024E adjusted EBITDA estimate from $496MM to $469MM leaving room for upside should 2024 adjusted EBITDA guidance be met. Our price target decreases from $46 to $43.
Key points:
• Eyeing a stronger set-up heading into 2025. Acknowledging inherent business model volatility, we view current levels as an accumulation opportunity reflecting the alignment of: (i) recalibrated expectations following the provision of 2024 guidance with renewed M&D momentum in H2/24; (ii) the positive flow through of $25MM-$30MM in M&D net cost synergies through 2026; (iii) easier YoY comps with the lapping of the more challenged macro and operating environments in 2023/2024; (iv) a strengthening IP pipeline underpinned by PAW Patrol Universe, Unicorn Academy and Vida the Vet, new digital game launches and a stronger toyetic release slate in 2025; and (v) an attractive valuation (FTM EV/ EBITDA of 6.2x versus an average for toy peers of 9.5x) alongside a strong balance sheet (1.1x as of Q3/24), healthy FCF generation ($1.40/share for 2024E) and an active NCIB.
• Consumer spending to remain in focus. Despite a challenged macro environment, management reiterated its 2024 outlook indicating: (i) the U.S. election, a late U.S. Thanksgiving and resulting shorter holiday period should be a timing dynamic rather than demand dynamic, albeit with management acknowledging Q4/24 performance as usual will ultimately be determined by consumer spending and the strength of the replenishment cycle; (ii) the risks of material inventory markdowns and heavy promotions are lower YoY with retailer inventories down -20% globally (-12% in the U.S.); and (iii) Digital Games should return to positive revenue growth in Q4/24.
• Decent underlying Q3/24 results with M&D back on its front foot. Excluding M&D and the $15.6MM in Q3/23 distribution revenue, revenue and adjusted EBITDA increased +5.2% and +4.0% YoY, respectively, with adjusted EBITDA growth absorbing a -$8.5MM YoY decline in Digital Games (-48.3% YoY). Toys gross product sales increased +9.1% YoY with POS down -1% globally (in line with the broader industry) while Toys revenue and adjusted EBITDA increased +9.0% and +15.6% with YoY performance benefitting from the shift of ~$30MM in orders from Q2/24. M&D performance in Q3/24 notably improved with POS growth of +7.4% YoY and double-digit growth in gross product sales. While M&D revenue in H2/24 relative to management commentary in Q2/24 is tracking ahead of expectations, management indicated a degree of prudence is being factored into full-year guidance to reflect a higher level of M&D shipments that take place near quarter-end.
