Description

Thunderbird Entertainment Group Inc. (TBRD or the Company), is an award-winning Vancouver based media production, distribution and rights management company. Its programs air daily in 40 different languages and 200 territories worldwide. It has deep and growing relationships with prominent streaming services such as Netflix, Hulu, Amazon and Disney+ in addition to traditional networks such as NBC, PBS, Discovery and CBC. We believe that the increased demand for programing caused by the COVID pandemic represents an inflection point for the Company leading to explosive growth in Adj. EBITDA from an expected C$12mm in FY 6/2020 to C$27mm for FY 6/2022. Using a very conservative 12x trailing Adj. EBITDA, we expect shares to at least double by June 2021 and reach C$7.18 by June 2022 from the current price of C$2.00.

Company history and business

The company was founded in 2003 and acquired several smaller production houses in the 2013-2016 time period. TBRD became a public entity in October of 2018 though the reverse merger of Thunderbird Entertainment Inc. into Golden Secret Ventures Ltd, a Canadian publicly traded shell company. The combined entity then changed its name to Thunderbird Entertainment Group, Inc.

TBRD focuses on “feel good” family programing in the areas of animation, factual and scripted (sit-com) content. This type of programing generally “travels” well and its content has been shown in over 200 territories.  The shows it has produced include the Peabody award winning “Molly from Denali”, “Highway Thru Hell”, “Beat Bugs”, “Kim’s Convenience”, “Heavy Rescue” and “The Last Kids On Earth”.

The Company has historically produced most of its content in Canada allowing it to take advantage of Canadian Production Tax Credits, subsidies from the Canadian Media Fund and local tax incentives. More recently, the Company has opened production facilities in LA at the request of Netflix and management does not anticipate any margin loss from this expansion.

TBRD’s management team has a long track record of success.  CEO, Jennifer McCarron, grew Atomic Cartoons from 14 to over 700 employees.  She has won an Emmy and a Peabody award.  The President, Mark Miller, has 35 years of experience and oversees all scripted and unscripted production.  Finally, one of the key board members founded Lionsgate Entertainment, one of the most successful start-ups in the movie and tv production business.

Divisions

Atomic Cartoons (“Atomic”) produces high-end content across multiple pipelines and genres spanning pre-school, comedy, action adventure, adult and everything in-between.  The shows it has been involved with include:

1.       Molly from Denali

2.       101 Dalmatian Street for Disney

3.       Rick and Morty

4.       The Last Kids on Earth for Netflix

5.       Hello Ninja for Netflix

6.       Beat Bugs for Netflix

7.       Hilda

8.       Atomic Betty

9.       Rocket Monkeys

10.   The Secret Exhibit (Lego/Jurassic World)

11.   Super Dinosaur

12.   Winston Steinburger

Atomic has studios in Vancouver and Ottawa, Canada and in Los Angeles.  Long established relationships with key buyers including HBO Max, Nickelodeon, Discovery Channel, Apple TV+, Disney+, NBCUniversal, CBC and traditional broadcast and cable channels.  It has Partnerships with top talent; recent examples include Savannah Guthrie, Drew Barrymore and the writers from The Simpsons.

Great Pacific Media (“GPM”) is a global leader in factual television with programs seen in more than 170 countries.  GPM is a Specialist in development, production, co-production and financing of factual, documentary, game show and reality television.  Its shows include:

1.       Queen of The Oil Patch

2.       Highway Thru Hell

3.       Heavy Rescue 401

4.       Untold Stories of the ER

5.       High Arctic Haulers

6.       Worst to First

7.       Save My Reno

8.       Model Killers

9.       Daily Planet

10.   Airshow

11.   Curiosity Stream

12.   Prisoners of Age

13.   Game of Homes

14.   Confessions: Animal Hoarding

15.   Monster Quake

GPM uses an AI/Data driven approach which it believes increases probability of ratings success while reducing production time and costs.  GPM’s shows have industry leading ratings and renewal rates.  GPM owns 100% of its intellectual property.  It uses a vertically integrated studio model; GPM owns all its facilities and production equipment generating multiple revenue streams.

Content demand

Covid 19 caused TBRD to quickly go to a work from home model for its cartoon related production with no negative effects on productivity.  This has worked to the Company’s benefit as it was able to onboard many new employees to meet the increasing demand for content. There is currently a streaming boom across the world. Growth in total streaming minutes for 2020 over 2019 has been running well over 100% as can be seen in the slide below from the Company.

This increase in viewership is hastening the move to “Over the Top” solutions to watch media content.  There are quite a few notable launches to compete with NetFlix (NFLX), Hulu and Amazon Prime including Apple TV+, Disney +, Peacock and HBO Max.  TBRD sits in a strong position to provide content to these new distribution partners.  This move to “Over the Top” is driving strong demand for content and the following slide details this trend.

TBRD uses two business models to produce revenues; Intellectual Property and Services/Partnership, which are discussed in detail below.

Intellectual Property (“IP”)

On the IP side of the house, the Company owns 100% of the content forever, including distribution and licensing rights. These projects also carry the most risk since TBRD is developing them at its own expense and “on spec”. However, the Company has many ways of mitigating the potential risks and expenses.  One way of doing so is to license a property that has had success in other types of media including books and/or plays. Then, by bringing in interested partners early, as well as by obtaining grants from the Canadian Media Fund, TBRD can minimize its upfront cost and associated risks while retaining long term rights.

As an example, the Company optioned (and now owns) the TV rights to Kim’s Convenience (one of its flagship programs) which was already a successful play in 2014. Pre-production, it got CBC interested in the project and obtained some production funds from that company. By filming in Canada and using Canadian actors TBRD was able to obtain additional funding from the Canadian Media Fund for two seasons.  The first season aired in Canada in October 2016 on CBC. In July 2018, TBRD reached an international distribution deal with Netflix for the show. CBC and Netflix have signed up for additional episodes; season 5 had just begun shooting and season 6 is in development. A spin-off, Nicole Power, has just been ordered by CBC.

One item of note is that revenues from this division are only recognized when a show is sold and a distribution partner begins to air it. So, if for example, Nextflix takes delivery of season five of Kim’s Convenience for showing in the US in March of 2021 but doesn’t begin to air it until April, revenues will be recorded in the quarter ended June (the Company’s 4th quarter). Expenses by contrast are recognized as incurred. This creates a revenue lag which can cause significant variability between quarters. As the Company grows its IP division, this will become less pronounced as more shows and a deeper library will result in less variable revenue stream.  As evidence of this fact, library revenues grew to 12% of total revenues in 2019 from 5% in 2017 and 2018.   

Services and Partnerships

Historically the Services group is the exact opposite of the IP division; TBRD produces content at the request of someone else, assumes no risk but retains no rights. Recently some Services clients have agreed to a Partnership model under which TBRD is hired to handle all creative from writing through post-production and delivery. The project is fully cash flowed by the Partner, plus a substantial producer fee is paid to TBRD. The Company then also receives a percentage the back-end sales from merchandise, gaming and cross media exploitation.   

While the IP and Services divisions accounted for an almost 50/50 revenue split in fiscal 2019, the Services division has seen explosive growth in 2020. While the Company has not yet reported its June (Q4) numbers we expect that YoY services revenues will up better than 55% from 2019. We expect this high growth rate to continue, though at a more modest 30% rate in 2021 and 2022. By contrast we expect about 11% annual growth from the IP division.

The difference in growth rates is primarily due to the very long lead times associated with the IP sector. It can easily take two or three years between identifying a desirable property, securing the rights, finding the right partner, shooting a pilot, and finally greenlighting a full season. As TBRD has grown, so have the number of projects in its IP pipeline but as most of the growth has been recent, many of these projects are still a couple of years from meaningful revenue contribution.

By contrast the Services side of the business can ramp very quickly indeed.  The Company has successfully implemental a very cash flow friendly process for the Services division, under which the customer initially provides an upfront payment and later makes regular progress payments as the project work is completed. To the extent that additional working capital is needed, TBRD is able to effectively factor its Canadian tax credits to provide inexpensive liquidity.   

Canadian Tax Incentives

TBRD benefits from a large number of Canadian tax credits that help reduce both the costs and risks of its projects.  This has enabled TBRD to remain debt free during its expansion.  These credits are shown on the slide below from the Company:

Pandemic Impact

While many companies have been adversely affected by the COVID pandemic, the opposite has been true for TBRD. Its customers, both Network and Streaming have had a strong increase in demand for product; especially for the type of “family friendly” programing that is TBRD’s specialty.  Furthermore, TBRD was very quick to move to a work-from-home-model. While this initially meant some higher networking costs, it quickly proved a benefit as the Company could now hire production staff anywhere in the world allowing it to ramp projects very quickly, especially on the animation side.

This successful response to COVID has led to deepening customer relationships with key clients which we believe will remain long after the current pandemic. For instance, Netflix asked the Company to open an LA location in order to facilitate a closer working relationship. Furthermore, as its large customers gain increasing confidence in TBRD’s ability of consistently execute on projects they are increasing likely to rely on TBRD especially as the Company presents a very cost effect alternative.

Growth Opportunities

TBRD has a number of growth possibilities as has been discussed above. 

1.       The opening of its Los Angeles production facility was done at the behest of its customers.  There is significant demand for animated content, which is a specialty of TBRD’s Atomic division.  This will lead to further tie-ins with merchandise related sales of toys and clothing from that content. 

2.       TBRD has successfully acquired and built up two divisions and would certainly look to add other companies that fit its approach to creating profitable content.

3.       Expansion into animated feature film production

4.       Further develop proven, unscripted brands (expanded season order, spinoffs, derivative projects).

Here is a case study provided by TBRD to highlight point number four.

It should be noted that none of these potential revenue streams is included in my projections in the next section.

Projections and Valuation

$1,000 Canadian

As discussed above, the Company responded quickly and effectively to the Covid pandemic and as a result, revenues in FY 2020 will increase markedly. However, the company did incur some excess costs as it scrambled to set up work from home arrangements and rush to meet client delivery deadlines. TBRD also spent money investing in its future as it opened the new LA office with all the associated startup costs. These events will result in compressed margins in 2020, which we believe will normalize over the next two fiscal years.

In addition to the rapid growth in demand from production services, TBRD has introduced a new source of revenue that it calls “Partnership” deals. Under this plan, clients still fund the entire cost of production and pay the Company its markup for services but in addition TBRD retains certain “back-end” rights. These could include sharing in revenues from video games, clothing or toys branded to the show it produced. While it will take some time for this new revenue stream to ramp, we believe that by fiscal 2022 it will contribute some very high margin income (well over 90%) for TBRD resulting in further margin improvement. 

As the company has only been public for a couple of years there is a limited history of trading multiples. However, we note that pre-pandemic the Company was trading at about 13x trailing EBITDA. At that time sales were relatively flat compared to the current accelerated growth. We also note that since releases from the IP division can move between quarters, it is most usefully to look at EBITDA over a 4-quarter period. We believe that given high growth rate, using 12x Adjusted trailing EBITDA is I believe a very conservative valuation parameter for what the stock should be worth in the future. Based on my projections this would value the stock at C$4.78 based on FY 2021 and C$ 7.18 based on FY 2022.  For comparison, Lionsagate (LFG-A or LGF-B) has historically traded at a high-teens to low twenties EBITDA multiple.  Thus, TBRD’s 12x multiple is a large discount to its only publicly traded peer.

Catalyst

1.  New content distribution deals

2.  Increased exposure to professional investors as the company profile gets larger

3. Increased revenue and earnings growth

4. Takeout by larger content distributor looking to own additional IP.