Echelon Wealth trims price target on Cineplex due to weak attendance numbers

Weaker than expected attendance numbers at its theatres have Echelon Wealth Partners analyst Rob Goff trimming his price target on Cineplex (Cineplex Stock Quote, Chart, News: TSX:CGX).

Yesterday, Cineplex reported its Q4 and fiscal 2016 results. In the fourth quarter, the company posted Adjusted EBITDA of $66.8-million on revenue of $385.4-million, a topline that was down 5.4 per cent from the same time last year. Attendance at Cineplex theatres was down 12 per cent compared to last year’s fourth quarter.

“In 2016, total revenue increased 7.8 per cent to $1.5-billion despite an attendance decrease of 3.2 per cent compared to 2015, which featured five of the top 11 highest-grossing films of all time. This increase in revenue was primarily due to the consolidation of Player One Amusement Group (formerly Cineplex Starburst Inc.),” said CEO Ellis Jacob. “While our film entertainment results were impacted by the attendance decline, we accomplished a great deal in 2016 including the opening of our first location of The Rec Room in South Edmonton Common and three new theatres. Our cinema media and digital place-based media businesses continued to grow, increasing 11.2 per cent to $170.8-million versus the prior year. Player One Amusement Group made two key acquisitions in the United States. Our adjusted EBITDA margins were negatively affected by the impact of the lower attendance and costs attributable to our emerging businesses as we execute our diversification strategy. We are confident that these investments made in 2016 have Cineplex well positioned for meaningful growth in the future. Looking ahead in 2017, we are encouraged by the film slate and we anticipate continued growth in our film entertainment and content, media and amusement, and leisure businesses as we continue to build the company for the future.”

Goff notes that the quarter came in “significantly below” his and the street’s expectation, across all metrics. He had modeled EBITDA of $76.3-million on revenue of $424.7-million, the street consensus was for EBITDA of $79.6-million on a topline of $405.8-million. But despite this poor performace, Goff says this may actually be a buying opportunity for investors.

“We would recommend the shares on potential further weakness given anticipated negative forecast revisions,” says the analyst. “Furthermore, we look for a tough start to the year measured against a strong Q116 and considering the YTD decline of ~3.3% according to Box Office Mojo. We continue to rate the shares a Buy given their defensive characteristics and considering the longerterm growth prospects as FCF is re-invested into high IRR initiatives including gaming, digital signage, The Rec Room, and recliners.”

In a research update to clients yesterday, Goff maintained his “Buy” rating, but lowered his one-year price target on Cineplex from $55.00 to $54.00, implying a return of 8.7 per cent at the time of publication.

Goff thinks Cineplex will post Adjusted EBITDA of $255.5-million on revenue of $1.54-billion in fiscal 2017.