Expect more modest EBITDA growth going forward from IMAX Corporation (NYSE:IMAX), says analyst Aravinda Galappatthige from Canaccord Genuity who on March 18 revised his estimates while maintaining his “Buy” rating and $26.00 target price (all figures in US dollars unless noted).
Mississauga-based IMAX saw a 17 per cent uptick in domestic box office revenue during the second half of 2017, compared to an industry average decline of seven per cent, yet Galapatthige sees an element of diminishing returns in the company’s model, with IMAX’s decreasing per screen averages (PSAs) to blame.
“While IMAX’s heavy backlog, recent signings momentum and mid-teen screen growth suggests a double- digit growth story, we believe that as one factors in the notably lower PSAs of incremental installations, potential dilution in JV take rates over time, the more likely outlook is for mid-single digit adj. EBITDA growth,” says the analyst in a research update to clients on March 18.
Based on a review of IMAX’s 10K financials and through discussions with the company, Galapatthige estimates 2019 adj. EBITDA growth of 4.4 per cent, which assumes a 3.6 per cent decline in global PSA and overall 2019 box office growth of seven per cent year-over-year.
The analyst sees IMAX entering a more meaningful free cash flow phase in 2018 and 2019, with the company’s strengthened cash position potentially signalling shareholder returns on the horizon.
“With IMAX already in a healthy net cash position, we see this building up even further through 2018/19, reaching $250 million in 2019 year-end,” says the analyst. “Thus, there is a compelling case for the board to consider a shareholder returns programme, preferably one that includes a healthy dividend.”
Galapatthige lowered his 2018 sales estimate from $398.1 million to $397.3 million and his 2018 adj. EBITDA estimate from $143.1 million to $139.0 million, arriving at a diluted EPS of $0.72, down from $0.84. His 2019 estimates remain unchanged.
The analyst maintains his “Buy” recommendation and $26.00 target price, which represents a potential return of 24 per cent as of time of publication.