Description

Thunderbird is a modest risk, modest reward play in the Canadian entertainment industry.

Thunderbird Entertainment is a content creator based in Vancouver and Los Angeles which licenses and sells proprietary programs and content. The company specializes in the production of cartoons for kids, as well as reality TV documentaries through its Atomic Cartoon and Great Pacific Media businesses. Thunderbird’s management team has a history of producing successful and high-quality programs.

The company operates in three separate media categories –

• Kids and Family: Production of youth series and movies, including animated television programs
• Factual: Production of documentaries through Great Pacific Media. Thunderbird owns popular shows, such as Highway Thru Hell, which recently released its 10^th season
• Scripted: Comedy series, including Kim’s Convenience which has already been renewed for a season 6 in 2022

While the company is relatively small, with a market cap of over $220M CAD, the company has been able to secure licenses to produce relatively well-known movies and shows, such as Blade Runner 2049, or the Marvel Super Hero Adventures animated series.

Cheap capital due to Canadian content laws

Tax Credits

Thunderbird makes an effort to ensure that the majority of its content is considered Canadian. This provides numerous benefits to the company due to capital/tax credits provided from the Canadian government. Specifically, the company benefits from the following credits:

• 15% of the production cost is subsidized by the Canadian Production Tax Credit
• 25% are subsidized through provincial film/tax credits
• Further production (up to 25%) may be subsidized through the Canadian Media Fund

While the tax credits are only received after the completion of production, Thunderbird is able to finances productions in progress using loans secured by these tax credits. The credits provide a significant advantage to Thunderbird as they enable the company to produce higher quality content, produce more content, as well as outbid peers when it comes to content acquisition and origination.

Tax Credit Guidelines

Bill C-10

Currently, Canadian broadcasting stations must broadcast ~60% Canadian content from 6pm to Midnight. Streaming providers were exempt from Canadian content rules, however Bill C-10 is attempting to even the playing field. While the bill failed to pass in the Senate, the Liberal party (currently governing) has stated that passing Bill C-10 continues to be a priority if they win the upcoming election. Passing the bill is part of their “100 day” plan.

Global streaming wars should result in strong growth

Thunderbird, as a production studio, produces and licenses tv shows to the highest bidder. As a studio, its success does not depend on the prosperity of a particular broadcasting provider or streaming platform. The “picks and shovels” nature of the business should enable Thunderbird to significantly benefit from increased competition between platforms, especially as each provider increases content spend in an attempt to gain and retain customers.

Over the last few years, content spend has significantly increased, primarily at Netflix where spend was $5B in 2016 and has increased to $17.3B in 2020. In 2020, Amazon spent $11B on tv series, a 41% increase from prior years.

In addition, Thunderbird’s speciality in animated kids programming may benefit from Disney’s decision to enter the streaming industry, especially as they move their proprietary content off of Netflix and other platforms. These platforms, especially Netflix, may have to turn to animation studios, such as Atomic Cartoon (owned by Thunderbird) to replenish the lost content further supporting growth.

Financials & Valuation

Backlog

The company’s current production backlog stands at $102.2M, up from $86.1M in the year prior. The backlog should allow for strong revenue growth for Thunderbird over the next few years.

Financial Forecast & Valuation

Thunderbird does not have much room for multiple expansion given that it trades in roughly the middle of the range as compared to other public competitors. However, its closest peer is Wildbrain, a Canadian production company that specializes in kid’s content. As Wildbrain trades at 13.5x CY2022 EBITDA, there may be some room for a re-rating.

Assuming that Thunderbird re-rates to 13.5x CY2022 EBITDA (similar to Wildbrain), the stock should trade at $5.15, which represents 17% upside.

Risks

• Media business cyclicality
• Cancellation of major shows, such as Kim’s Convenience

Catalyst

• Election/Bill C-10 Passing
• Continued execution on projects in backlog