Attendance may be down at the movies but there’s still a lot to be bullish about Cineplex (TSX:CGX), including the sheer dominance it has on the Canadian theatre market, says Rob Goff, analyst with Echelon Wealth Partners. On Tuesday, Goff reiterated his “Buy” recommendation and one-year price target of $40.00 for CGX.
Yesterday, Cineplex posted its first quarter ended March 31, 2018, financial results, which featured a nine per cent drop in attendance compared to Q1/17. The company saw a 6.2 per cent decline in box office revenue, even as their ability to generate revenue per patron improved by 2.4 per cent.
“We continue to execute our diversification strategy to reduce our reliance on the relative strength of quarterly box office comparisons,” said Ellis Jacob, President and CEO, in a press release. “Total revenue for the first quarter of 2018 was relatively flat, down 0.9 per cent to $390.9 million compared to the same period last year, as the revenue strength of the new businesses was offset by the decline in exhibition revenue as a result of a 9.3 per cent attendance decrease.
Nevertheless, Goff sees a number of positives in Cineplex’s attempts to diversify its business.
“With a tough box office attendance outlook, growth (beyond quarterly swings) leans on higher per patron revenues from the box office revenues (BPP) and concessions (CPP),” says the analyst in a client update. “Both yield measures were strong on the quarter with the BPP ahead 2.4 per cent y/y (despite a lower premium mix at 41.1 per cent, against 44.9 per cent for the prior year, with 3 of the top 5 movies having 3D against 4 of 5) and the CPP gained 6.7 per cent y/y (with alcohol now at 15 locations, up from 5).”
“We believe CGX’s dominant market share at 85+ per cent outside of Quebec gives it significantly greater leverage to drive ancillary business, such as the Rec Room when it does not have the same combination of secular and competitive pressures facing its US peers,” he says.
“Cineplex’s longstanding reputation for disciplined execution was supported by the company’s launch of an efficiency program, where annual savings are put at $25 million against upfront costs of $5 million. These savings reflect technology gains and notable are not an offset to higher minimum wages, where the company has reduced hours as an offset,” he says.
Goff believes further consolidation in the theatre entertainment sector worldwide means that Cineplex may be a potential takeover target, with a nod to domestic telecom companies who could leverage Cineplex’s market dominance and nine million Scene loyalty members. He is also bullish on what he calls the company’s more aggressive investment profile, which includes a stated intent to invest $350- to $450-million in growth initiatives over the next four years.
Goff has lowered his 2018 forecast, calling for revenue of $1,606.3 million (was $1624.8 million) and EBITDA of $240.1 million (was $243.8 million).
His target of $40.00 for CGX is derived from a 9.6x 2018 EV/EBITDA valuation and represents a projected return of 49 per cent at the time of publication.