CANADA BEST IDEAS
CANADA BEST IDEAS: EMERGING CATALYSTS SHOULD IMPROVE VALUATION
THE TD COWEN INSIGHT
Spin's current valuation is punitive, reflecting a challenged consumer and the disappointing performance of its M&D acquisition. M&D showing clear signs of improvement and an exciting line-up of releases, and the industry appearing to stabilize, should support strong H2/24 results, with Spin on track to achieve 2024 guidance. We expect investor confidence to improve, supporting multiple expansion.
Summary Of Our Thesis
We believe Spin's collaborative business model is positioned to achieve attractive y/y revenue/EBITDA growth and strong FCF in H2/24 that accelerates in 2025. We view its current valuation as punitive, and reflective of a challenged consumer environment but more so in our view, missteps out of the gate with its Melissa & Doug (“M&D”) acquisition. With M&D showing clear signs of improvement, the industry appearing to stabilize, and an exciting line-up of releases/licenses, we believe Q3/24 results should return to growth and improve investor confidence upon it achieving its annual financial guidance.
What Is Underappreciated Or Misunderstood?
We believe Spin's punitive valuation relative to peers largely reflects investor frustration with M&D inclusive of its initial guidance and poor communication with respect to its seasonality. We believe the Q2/24 conference call communicated early signs of financial improvement following underinvestment in Q4/23 by private equity. This included double- digit y/y shipment growth as Spin invested in the brand, retailers migrated to FOB shipping, and the insourcing of its distribution network in Canada/Mexico. More important, in recent days we have seen this strong pre-sale demand for its Ms. Rachel product launch including its collaboration with M&D.
Catalysts & Milestones To Watch
The next catalyst should be improved visibility on its 2024 financial guidance, inclusive of M&D, that should emerge with its Q3/24 results improving investor confidence in its guidance. We note the current consensus allocation between Q3/24 and Q4/24 likely needs to be updated pre-results to be more reflective of management guidance.
Price Target & How We Value The Stock
Our C$46 price target is derived by applying a 7.25x target multiple to our 2025E EBITDA. This multiple reflects an ~2.5x discount to its peers that we view as appropriate until investors gain comfort in the financial outlook for M&D/2024 guidance.
What Is The Bear Case & The Risks To Our Call?
The key risk to our outlook includes an inability to successfully integrate M&D, a challenged retail environment, achieving its 2024 guidance, and negligible growth in 2025.