Spin Master Corp T.TOY

RBC

[retiredcf]

Have a $47.00 target. GLTA

September 22, 2024

Spin Master Corp.

Company description

Spin Master is a global children's entertainment company with a diverse portfolio of toys, entertainment franchises and digital games and an international footprint, distributing toys in over 100 countries while entertainment reaches 190 countries. The company is best known for brands PAW Patrol, Bakugan, Kinetic Sand, Air Hogs, Hatchimals, Rubik's Cube, GUND and Melissa & Doug, and is the global toy licensee for other popular franchises.

Investment summary

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 including the lower than expected Melissa & Doug (M&D) contribution; (ii) the positive flow-through impact of $25MM-$30MM in M&D net cost synergies on adjusted EBITDA volatility/visibility through 2026; (iii) easier YoY comps with the lapping of the more challenged macro and operating environment in 2023; (iv) a strengthening IP pipeline underpinned by PAW Patrol Universe, Unicorn Academy and Vida the Vet and new digital game launches; and (v) an attractive valuation (FTM EV/EBITDA of 6.7x versus an average for toy peers of 9.6x) alongside a strong balance sheet (1.2x as of Q2/24), consistent FCF generation ($1.11/share for 2024E) and an active NCIB.

Potential catalysts for the stock

• Stronger-than-expected gross products sales across the global toy industry driven by improving macro conditions and/or innovation

• Greater-than-expected monetization from new and evergreen franchise IP

• Greater-than-expected traction within Digital Games including from pending new game launches and/or growth in MAUs/subscribers

• Higher-than-expected adjusted EBITDA margins driven by a mix shift to higher-margin revenues

• A material improvement in earnings volatility and visibility with greater diversifying, recurring and/or margin accretive revenue growth resulting in multiple expansion

• Accretive acquisitions that offer exposure to new products, markets, licensing relationships and/or channels of distribution