Thunderbird Entertainment Group (TSXV: TBRD) is a global award-winning, full-service, multi-platform media production, distribution and rights management company headquartered in Vancouver, Canada, with additional offices in Los Angeles, Toronto, and Ottawa. Thunderbird’s programs cover multiple genres with a significant focus on children’s productions, scripted comedy and drama, and non-scripted (factual) content. Thunderbird also has a global distribution and consumer products division. Thunderbird’s programs are currently being broadcast via conventional linear means and a number of digital platforms in more than 200 territories worldwide. A substantial and growing portion of Thunderbird’s programming library has been licensed directly to leading internet “over the top” (OTT) platforms such as Netflix, Hulu, Amazon and iTunes, which offer subscription video on demand (SVOD), transactional video on demand (TVOD) and advertising video on demand (AVOD) to their customers.

Business Model

Source: Company

Investment Rationale

• Solid Q3FY21 Performance: TBRD exited the third quarter on a strong note, with revenue jumped by 27% on a YoY basis, adjusted EBITDA soared 8% against the corresponding period of the previous fiscal. Net Income for the three months ended March 31 improved by 14% to CAD 3.610 million. The majority of the increases over the comparative periods in 2020 was related to growth in production services attributed to the Kids and Family Division.
  

• Asset Light Business Model: Net Block is a mere 16% of the total asset. Therefore costs of investment and running the business is less, and revenue and profits would be more. Also, businesses with high scalability and lower capital requirements are more attractive to equity investors, especially in penny cap categories.
  

• Increased Focus on International Expansion: Thunderbird’s strategy is to intentionally grow the Company’s divisions and their respective brands by developing long-term value through the expansion of its programming library and leveraging its owned or controlled intellectual property (“IP”). While Thunderbird generates fee income during the production and initial distribution windows for its programs, one of the Company’s main objectives is to create long-term value with programming that can drive multiple revenue streams. This involves developing and owning content that has established brand recognition, which in turn helps generate a broad array of revenue streams from licensing, such as merchandise, music, video games and other ancillary sources over an extended period.
  

• Increased Attention Towards the Kids and Family Programming: Children’s programming had been and continues to be an important and growing component of Thunderbird’s production slate and proprietary library. In 2015, Thunderbird expanded its focus on kids and family programming by making a substantial investment in animated programming with the acquisition of Atomic. Today, Atomic’s roster of clients and partners includes Netflix, Nickelodeon, PBS, Spinmaster, Sony, AppleTV+, Teletoon, Treehouse, Cartoon Network, Walt Disney, Mattel, Warner Bros., Marvel, Microsoft, Lego and NBCUniversal. Productions that Atomic has worked on include The Last Kids on Earth, Trolls: Trollstopia, Molly of Denali, Curious George, The Lego Star Wars Holiday Special, Hello Ninja, and Beat Bugs. Moreover, over the last six months, the majority of revenue growth reported by the Company was mainly on account of growth in the kids and family division. Further, The Last Kids on Earth franchise announced that the video game The Last Kids on Earth and the Staff of Doom would launch and be available for sales in the spring of 2021.

• Gaining Technical Strength: On the daily price chart, the prices are sustaining above the rising trend line. Recently, the stock price took the support of the trend line and bounced back. Moreover, the price recorded a breakout of the 21-day SMA resistance level and continued to trade above it. Now, 21-day SMA is likely to act as a support level for the prices. Further, 14-day RSI recorded a sharp surge in the TBRD counter, as over the last three trading sessions, 14-day RSI has moved from 35 to 54, reflects a sudden surge in the buying interest. The 14-day RSI is hovering in a neutral zone with a bullish bias. Moreover, TBRD shares are trading well above the long-term crucial support level of 200-day SMA, which is considered as a strong long-term support level in an underlying.

Technical Chart, Source: REFINITIV, Analysis by Kalkine Group

• MACD indicates a Bullish Move: The leading momentum indicator, the Moving Average Convergence Divergence (MACD) has registered a crossover on July 02, and post that continued to hover above the 9-day SMA signal, which is a bullish indicator. Moreover, the MACD is rising, with the spread between short-length 12-day EMA and 26-day EMA is positive; this is another bullish indicator.

Source: REFINITIV, Analysis by Kalkine Group

• Risk Associated to Investment: The company is exposed to intense competition, also product acceptability among the large communities is one major risk. Further, the company is also exposed to change in technology, currency exchange risk and interest rate risks.

Financial Highlights: Q3FY21 and 9MFY21

• The company reported a revenue of CAD 37.7 million and CAD 85.4 million in the three and nine months ended March 31, 2021; this reflects an increase of 27% (CAD 8.1 million) and 42% (CAD 25.2 million) over the comparative periods. Most of the increases over the comparative periods in 2020 was related to growth in production services attributed to the Kids and Family Division.
• Adjusted EBITDA was CAD 7.4 million and CAD 17.3 million for the three and nine months ended March 31, 2021, increases of 8% (CAD 0.5 million) and 39% (CAD 4.8 million), respectively. These increases were primarily due to growth in production services revenue, as well as increases in licensing and distribution revenue due to an increased number of proprietary shows delivered over the comparable periods.
• Production services revenue was CAD 19.4 million and CAD 53.2 million for the three and nine months ended March 31, 2021, increases of 52% (CAD 6.6 million) and 53% (CAD 18.4 million) over the comparative periods, due to an increase in the number and size of contracts. This revenue consists primarily of animation production services, which experienced continued growth.
• Licensing and distribution revenue was CAD 18.3 million and CAD 32.1 million for the three and nine months ended March 31, 2021, increases of 9% (CAD 1.5 million) and 27% (CAD 6.8 million) over the comparative periods, due mainly to the delivery of the animated series The Last Kids on Earth in the current period.
• Free cash flow was CAD 1.8 million and CAD 7.5 million for the three and nine months ended March 31, 2021, a decrease of CAD 2.7 million and increase of CAD 2.8 million, respectively. These fluctuations are mainly due to changes in working capital and production loan repayments.
• As of March 31, 2021, the Company's production backlog was CAD 102.2 million compared to CAD 86.1 million as of March 31, 2020. Backlog is defined as the undiscounted value of signed agreements for production services and licensing and distribution agreements for which the Company expects to recognize revenue in future periods.
• During Q3, Thunderbird had 21 programs in various stages of production. The Company's work currently streaming airs on Netflix, Peacock, Nickelodeon, AppleTV+, Hulu, PBS, Bell Media's Discovery, Disney+, Corus Entertainment and the CBC, among others. Ten of the programs are Company-owned intellectual property or partner-managed.

Top-10 Shareholders

Top-10 shareholders together hold approximately 45.99% stake in the company, with Radcliffe Foundation and Paes-Braga (Brian Alexander) are among top two shareholders holding 13.87% and 7.82%, respectively.  

Valuation Methodology (Illustrative): EV to Sales based Valuation Metrics

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation: Thunderbird Entertainment is a rapidly growing and highly profitable, multi-platform business, with 200 trusted global partners including Netflix, HBO Max, Nickelodeon, Discovery Channel, Apple TV+, Disney+, NBCUniversal, CBC and traditional broadcast and cable channels. Moreover, the group is continuing to pursue an aggressive organic growth strategy through investment in owned-IP as well as strategic M&A.

The group has a highly regarded management team with an industry-leading track record of working with the best creative talent and developing global brands and rating hits.

The 5G expansion is a favourable development for the overall entertainment industry as the launch of 5G is driving demand for new high-quality content as users will be able to download content within seconds on any device, at any time, anywhere in the world.

Also, with a robust slate of programming, Atomic has been expanding rapidly, and Children’s programming has been and continues to be an important and growing component of Thunderbird’s production slate and proprietary library.

Thunderbird’s factual division, GPM, remains a dominant player in the non-scripted (factual) marketplace with multiple long-running television series.

To chase the global trends, an increasing portion of Thunderbird’s growth and future business focus is with OTT platforms such as Netflix, Amazon and others. TBRD intends to continue to be known as a preferred supplier of programming for these leading OTT platforms with the strategy of building iconic brands where possible. Through the creation of the Company’s consumer products and distribution division, Thunderbird intends to develop more and expand on its owned content. Based on Technical Analysis, the stock has support at CAD 3.52 level.

Therefore, based on the above rationale and valuation, we have given “Speculative Buy” recommendation at the closing price of CAD 4.44 on July 06, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

1-Year Price Chart (as on July 6, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

*Recommendation is valid on July 7, 2021 price as well.

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