Thunderbird Entertainment Group Inc (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.

Investment Rationale

• Industry Leading EBITDA and Net Margin: In the quarter ended March 31, 2021, the Company's reported EBITDA margin stood at 47.6%, which is significantly higher compared to the industry median of 11.1%. Moreover, EBITDA has consistently improved over the last three consecutive quarters, which implies that the Company is recovering after COVID-19 led disruptions in 2020. The Net Profit margin in the March ended quarter stood 9.5%, higher than the industry average of 3.8%. The above crucial profitability metrics, which indicates that regardless of the penny cap market-cap categorization of the Company, it has a strong competitive advantage in terms of converting sales into higher profitability and also reflects diligent financial management at the Company's end.

• Strong Balance Sheet: The Company has a strong balance sheet, with a total asset of CAD 155.5 million at the end of the March quarter of 2021, vs total liabilities of CAD 91.4 million at the same time, with strong cash and cash equivalents position of CAD 18.8 million. Further, despite a higher Debt/Equity ratio of 1.64x, the long-term debt to capital ratio is at the lower side at 16.8%, with robust debt protection measures at the same time. The interest coverage ratio stood at 14.65x, and the Net/Debt to EBITDA ratio stood at 2.31, which implies negligible balance sheet risk. Also, the majority of debt is there to fund working capital requirements.

• 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 internationally 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. 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 has been and continues to be an important and growing component of Thunderbird's production slate and proprietary library. Thunderbird expanded its focus on kids and family programming by making a substantial investment in animated programming with the acquisition of Atomic.

• Technical Strength: After the recent sideways moment for a couple of trading sessions, TBRD shares have now started hovering in bullish territory, with stock traded above the crucial short-term moving averages of 21-day and 50-day SMAs, and more importantly, the moving averages are also rising which making the bullish trend stronger. Further, its shares have traded above the crucial support levels for the two consecutive sessions, which implies that the bulls are getting a grip on the stock. Also, in the last trading session, TBRD shares traded above the 20-day SMA and now moving towards the Upper Bollinger Band©, which is another bullish indicator.

Technical Price Chart (as on August 31, 2021). Source: Refinitiv, Analysis by Kalkine Group

• Registered a Breakout on Daily Price Chart: On the daily chart, TBRD price broke out the downward sloping trend line resistance at CAD 4.31 level. After the breakout, prices are sustaining above the downward sloping trend line breakout level. Moreover, the prices are trading above the trend-following indicators 21-period SMA and 50-period SMA, indicating a bullish trend. The leading indicator RSI (14-period) is trading at ~58.07 level, indicating positive momentum in the stock.

Technical Price Chart (as on August 31, 2021). Source: Refinitiv, Analysis by Kalkine Group

• Risk Associated to Investment: The company is exposed to a variety of risks ranging from intense competition, product acceptability among the large community and is exposed to changes in technology, currency exchange risk and interest rate risks as well.

Financial Highlights: Q3FY21

• During the quarter under consideration, the company reported revenue of CAD 37.7 million as compared to CAD 8.1 million reported in the same quarter of the previous financial year, which implies a jump of 27% on a YoY basis.
• The majority of growth came from increases over the comparative periods in 2020 is related to growth in production services attributed to the Kids and Family Division.
• In the same quarter, the company reported an Adjusted EBITDA of CAD 7.4 million, an increase of 8% on a YoY basis. The increase was 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, an increase of 52% 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 for the three months ended March 31, 2021, an increase of 9% on a YoY basis.
• Free Cash Flow for the quarter under consideration stood at CAD 1.8 million, a decrease of CAD 2.7 million on a YoY basis. The fluctuation was mainly due to changes in working capital and production loan repayments.
• At the end 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.
• During Q3, Thunderbird had 21 programs in various stages of production. The company's work currently airs on Netflix, Peacock, Nickelodeon, AppleTV+, Hulu, PBS, Bell Media's Discovery, Disney+, Corus Entertainment and the CBC, among others.

Source: Company Filings

Top-10 Shareholders:

Top-10 shareholders together hold approximately 47.55% stake in the company, with Radcliffe Foundation and Paes-Braga (Brian Alexander) are the top two shareholders holding 13.87% and 7.82%, respectively.

Valuation Methodology (Illustrtive): EV/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 company reported a decent quarterly result amid a challenging operating environment. Moreover, the company is focusing on international expansions and focusing on creating a long term value that can generate multiple revenue streams. Further, the company has a strong balance sheet with robust risk protection metrics and generating free cash flows consistently. Also, technical indicators are quite bullish, with stock traded well above the crucial support levels of 21-day and 50-day and the RSI hovering in a neutral zone with a bullish bias.

Therefore, based on the rationale discussed above and valuation, we recommend a “Speculative Buy” rating on the stock at the closing price of CAD 4.39 on August 31, 2021.

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

Technical Analysis Summary

1-year Price Chart (as on August 31, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

*Recommendation is valid at September 1, 2021 price as well.

Disclaimer

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