Ahead of IMAX Corporation’s (NYSE:IMAX) quarterly earnings report on May 1, analyst Aravinda Galappatthige of Canaccord Genuity says the theatre entertainment company’s new laser projection system is likely to derisk their long-term business model. In a client update on Wednesday, Galappatthige reiterated his “Buy” recommendation and US$26.00 price target for IMAX.
Yesterday, Toronto-headquartered IMAX announced deals with both Cineworld/Regal and AMC to upgrade their IMAX theatres with the company’s IMAX with Laser system, which is said to offer brighter images, deeper contrast with more colours.
With installations to take place between 2018 and 2022, the two deals come with renewed 12-year contracts with the theatre giants.
Galappatthige says the contracts will support the company over the long term.
“We believe that the substantial take up by the two major exhibitor chains early on is an encouraging sign as to the value proposition of IMAX with Laser,” says the analyst. “Second, this sets up a further renewal cycle for IMAX’s joint ventures, extending the life of these arrangements for over ten years, thereby de-risking the longer-term business model. We understand the economics are similar to existing revenue share arrangements. Third, it places IMAX sufficiently ahead of any competing platforms, which would have been looking to achieve greater penetration of the premium theatre market.”
The analyst says that based on box office numbers, he expects IMAX’s Q1/18 to come in with $83.4 million (all figures in US dollars unless otherwise noted) in revenues, a 21.4 per cent year-over-year increase and adjusted EBITDA of $25.6 million, a 38.6 per cent year-over-year increase.
“We continue to view the 2018 film slate with some cautiousness,” says the analyst. “While we see an exciting Q2 line up, the seasonally important Q4 film slate looks particularly soft.”
Over 2018, Galappatthige thinks IMAX will produce sales and adjusted EBITDA of $397.3 million and $139.0 million, respectively, and sales and adjusted EBITDA in 2019 of $415.5 million and $145.1 million, respectively.
The analyst’s target price of $26.00 represents a projected return of 13.3 per cent.