IMAX having mixed box office despite Black Panther success, Canaccord Genuity says

Entertainment tech company IMAX Corporation’s (IMAX Stock Quote, Chart, News: NYSE:IMAX) fourth quarter 2017 results are encouraging, says Canaccord Genuity analyst Aravinda Galappatthige who expects to see double-digit adjusted EBITDA growth for IMAX in 2018 and maintains his “Buy” rating for IMAX.

On Tuesday, IMAX reported its Q4/17 and full year results, which boasted global box office revenue of $278 million (all figures in USD), which was up 13 per cent over 2016, while its domestic box office grew by 17 per cent during the second half of 2017, which compares well with a reported industry decline of six per cent.

“We saw tangible improvements to box office performance and operating leverage in the second half last year, largely the result of our implementing several initiatives aimed at refining our programming strategy and containing costs,” said Richard L. Gelfond, IMAX CEO in a press release. “We believe this underscores the IMAX consumer value proposition for compelling content and highlights the importance of analyzing our results separately from the overall industry’s. Moreover, our growing international presence in markets such as Japan—a market that housed our single strongest-performing theater last year—continued to contribute meaningfully to our overall results.”

Galappatthige says he’s encouraged by IMAX’s strong cost reduction efforts which could be headed to a flat opex in 2018 and leading to substantial earnings growth, which the analyst sees as critical for the company going forward.

“We continue to see double-digit EBITDA growth potential even with essentially flat y/y global PSAs in 2018, driven by screen growth and cost efficiencies,” says the analyst in a note to clients on Wednesday. “However, potential misses in Q2 and Q3 could lead to another flat to down earnings year. This, in turn, could re-rate its valuations. In addition, a lack of recovery in China could initiate a revision to backlog agreements as 309 of the 499 theatres in backlog are in Greater China.”

Galappatthige notes the theatre company’s estimates for new systems installations over 2018, which have been set at 145, come in lower than his expected 160. “In light of the heaving signings in 2016 and 2017 and the 165 we saw in 2017, this was somewhat of a surprise,” says the analyst.

Going forward, the analyst says that while the week ended February 18 saw a “dramatic turnaround” in IMAX’s box office revenues (said to be the result of returns from Black Panther and a solid week over Chinese New Year), the run-up to that week was less rosy.

“We saw meaningful under-performance in box office returns through 2017 and most of 2016, led by China,” says the analyst. “In that backdrop, expectations have settled at the $650-700 thousand PSA range for China, a far cry from the $0.9-1.3 million range a couple of years ago. So, the question is –what is the outlook post February 18? Management highlighted some of the tactical changes it has employed including leaning towards more 2D (vs. 3D) and its strategy of having a more expanded slate in China to give exhibitors greater flexibility. There are some signs that these strategies are having a positive impact, but in our view, it is too early to call for a trend reversal.”

The analyst has revised his estimates following IMAX’s Q4/17, with revenue and adjusted EBITDA rising slightly from $395.3 million and $141.3 million, respectively, to $398.1 million and $143.1 million, respectively.

Galappatthige maintains both his “Buy” rating and $26.00 target price for IMAX, representing an 11.8 per cent return at the time of publication.