Torrent Capital : Go Go Gadget Turnaround!

Go Go Gadget Turnaround!

We have been supporters of WildBrain Inc. (WILD-TSX) for some time, voicing our support for the company in prior blog posts on our website and in discussions with our network. WILD has been stuck in a "show me" vacuum after taking on too much debt, serially disappointing the market and losing its strategic direction.

We believe the company is now firmly in turn around mode. WILD has launched multiple initiatives to refocus company strategy, revamp its leadership team, de-risk its balance sheet and restore confidence in the market by forging a concrete path towards sustainable growth. Just like WildBrain's Inspector Gadget character, the company has been utilizing all the tools at its disposal and has orchestrated a Go Go Gadget turnaround!

You will recall that WildBrain is a leading children's content and brands company, recognized globally for high-profile properties such as Peanuts, Teletubbies, Strawberry Shortcake, Caillou, Yo Gabba Gabba!, Inspector Gadget, among other well-known franchises. The company licences its content to broadcasters and streaming companies with its properties viewed in 150 countries on over 500 streaming platforms. WildBrain Spark, its AVOD business, is one of the largest networks of kids' channels on YouTube with over 245 million subscribers. WildBrain's CPLG division licences consumer products and location-based entertainment in every major territory for its own properties as well as for third-party clients and content partners. WILD's television group owns and operates four family entertainment channels that are among the most viewed in Canada.

WILD's business is underpinned by secular shifts in consumer behavior and technology as content viewership moves online. Advertising-based video on demand is capturing an ever-larger portion of marketing spend and "streaming wars" remain in full swing as companies like Amazon, Netflix, Apple and Hulu compete to secure high quality kid's content. For a full snapshot of WILD's business please see the company presentation here.

WildBrain Revenue Profile

It has been a WILD ride for investors in the company as its shares have been marred by prolonged weakness and several false starts before finding what we believe is a bottom. Fortunately, we aggressively added to our shareholdings during the lows of 2020, to the benefit of our shareholders. Despite strong returns on our investment to date, we believe WILD is poised to deliver significantly more upside for its shareholders as the market appreciates its consistently improving prospects.

WILD: Share Price - 8 Years

Source: Bloomberg, Torrent Capital

WildBrain had been suffering a prolonged hangover from over spending on acquisitions, borrowing too much to pay for them, losing strategic focus and providing unrealistic guidance to the market.

WILD: Share Price (RS) vs. Net Debt / Cashflow (LS) - 10 Years

Source: Bloomberg, Torrent Capital

A look at aggregate analyst recommendations and price targets through time paints an interesting picture of where the company was versus where it is now. The market bought into WILD'S growth by acquisition strategy from 2012-2015, and there was tremendous optimism in the form of buy recommendations and ever-increasing price targets. As integration issues impacted corporate cash flows, the company's debt load became a serious concern for investors. Confidence in the company plummeted and analysts chased the stock lower with their price targets and recommendations. Interestingly, the nadir for WILD coincided with no buy recommendations on the stock and price targets below where the shares were trading in 2020. During this period, new management were busy addressing the underlying problems within the company, building a stable foundation to support sustainable growth, and developing their 360° approach to integrate all facets of the business.

WILD Share Price (RS), Analyst Target Price (RS), Analyst Consensus Recommendations (LS) - 10 Years

Source: Bloomberg, Torrent Capital

Under the leadership of CEO Eric Ellenbogen, WILD has been keenly focused on unlocking the inherent value of its considerable IP, streamlining its operations with a strengthened leadership team, de-risking its balance sheet and sourcing strategic capital to fund growth initiatives.

The Hallmarks of a WILD Turnaround

Source: Torrent Capital

WILD's 360° approach to its IP catalogue is a key initiative that will serve to unlock significant value over time. The new fully integrated approach encompasses brand management and monetization through its expertise in content creation, along with digital distribution and consumer products licensing. The 360° approach was initially applied to the Peanuts catalogue enhancing the value of that franchise across each business segment. The plan is to utilize a similar approach across WILD's other marquee brands. For example, the company recently announced a program to reinvigorate Strawberry Shortcake with a global rollout featuring an original YouTube Series, premium SVOD specials, a Roblox game and suite of consumer products and experiences. The Strawberry Shortcake franchise generated $4 billion dollars in revenue historically and WILD appears to be taking the right steps to reposition and relaunch the brand to maximize its earnings power in today's digital age.

WILD's 360° Approach in Action - Peanuts

Source: Company Reports

The company rebranded itself from DHX Media to WildBrain in the second half of 2019. WildBrain Spark is the name of the company's Advertising Video-on-Demand (AVOD) segment, a core growth engine moving forward.

Wildbrain management believe their Spark AVOD platform will be integral to launching and building new brands in the evolving digital landscape. The decline in traditional linear TV has constrained broadcasters from taking commissioning risk of new IP. While viewership and content demand has shifted to Subscription Video-on-Demand (SVOD) platforms such as Netflix and Amazon Prime, they are not optimal for building new brands and maximizing consumer product opportunities. The Spark AVOD platform allows for rapid market testing of new content, while reducing capital risk. It also increases reach and ad monetization through more curated audience targeting. To this end, as the industry matures, we expect increases in AVOD ad-pricing over time to higher levels seen in traditional television.

Spark is now a strategic focus and growth driver for WildBrain. It has become the largest kids and family AVOD network worldwide and will be a key growth driver for the business. It carries an average of 16.3 million US viewers per month, topping viewership of PBS Kids, The Cartoon Network, Nickelodeon Kids, and coming second only to Disney. We believe Spark will drive significant value creation for the company as viewership and watch time continues to grow from heightened levels.

WildBrain Spark vs. Kids' US Cable Networks

Source: Company Reports

Over the past couple of years Wildbrain improved its financial flexibility and cash generation while working hard to restore confidence within the capital markets. $300 million in debt has been paid down from asset sales, a rights offering to raise $60 million occurred and a $25 million capital raise was completed to fund growth initiatives. WILD's financial flexibility was also bolstered by refinancing a term loan with no financial covenants and improved duration. The company's net leverage ratio now stands at 5.71x and management has a stated goal to bring it to 4.5X by the end of 2022.

The company has begun generating free cash flow on a quarterly basis. As its 360° approach to brand management gains traction and it signs additional multi-year content and consumer product deals with high profile partners, cash flows will likely accelerate.

WILD is starting to surprise the market on the upside. The company reported a robust FQ4 2021, with revenue of $112.6M and Adjusted EBITDA of $19.2M against consensus expectations of $101.7M and $18.5M, respectively. Free cash flow grew 50% YoY in FQ4 2021 to $13.9M. F2022 guidance topped analyst estimates as well, with revenue and Adjusted EBITDA expected between $480-500M and $87-93M, respectively, versus consensus analyst estimates of $450.9M and $91.4M.

An improved debt profile and operating numbers not only bolster WILD's financial health; they also go a long way to restoring confidence of the capital markets.

WILD: Total Debt (LS) vs. Free Cash Flow (RS) - 8 Years

Source: Bloomberg, Torrent Capital

Resulting from the equity financings noted above, Wildbrain has a strengthened cap table with supportive strategic investors and increased insider ownership of approximately 48 percent. The ownership interests of insiders are well aligned with those of minority shareholders.

Strategic Shareholders and Insider Ownership

Source: Company Reports

In closing, we are witnessing a turnaround that has been a couple years in the making and we believe the stock price will continue to trend higher as management delivers on their stated priorities and plan. Our thesis is underscored by:

• The company is a direct play on the high growth AVOD and SVOD markets that are underpinned by secular shifts in consumer behavior and technology;
• WildBrain has made great strides to refocus company strategy, revamp its leadership team, de-risk its balance sheet and restore the confidence of the market;
• The company's 360° approach to its IP catalogue should foster a period of accelerated growth as it takes a firmer hold in 2022, and as WILD reactivates its multiple brands;
• Building on recent deals with Apple and Netflix, we envision additional content distribution deals with high profile streaming partners as they aggressively look to secure high quality kid's content;
• WildBrain Spark will drive significant value creation for the company as it monetizes its massive audience in an AVOD market that continues to grow in importance;
• The company now has a manageable and improving debt profile with enhanced financial flexibility;
• WILD has demonstrated operational progress underscored by enhanced revenue growth, improved margins and cash flow generation;
• WILD currently trades at 2.6X EV/FY2022 Revenue and 14.0X 2022 EBITDA which is in line with the peer group. We believe these multiples are modest given the company is in the early stages of a turnaround and has above average growth prospects along with a newly de-risked balance sheet.

Disclosure:

All information and statistical data contained in this blog were obtained or derived from public sources believed to be reliable, but Torrent does not represent that any such information or statistical data is accurate or complete and should not be relied upon as such. Currently, Torrent's portfolio includes a position in the shares of WILD.

The view expressed are the views of Torrent Capital and are subject to change at any time based on market or other conditions. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as recommendations to purchase or sell such securities or insurers.

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