After quarterly results for Canadian movie theatre company Cineplex (Cineplex Stock Quote, Chart, News TSX:CGX), analyst Rob Goff of Echelon Wealth is keeping his “Under Review” rating.
Goff reviewed CGX’s first quarter results and accompanying management commentary in an update to clients Thursday.
Toronto-based Cineplex announced its Q1 2020 results on Monday for the period ended March 31, 2020.
The company’s first quarter results saw the early impact of the COVID-19 pandemic on its operations, starting with seating reductions in early March and then the total closure of all its theatres on March 16.
Revenue for Q1 came in at $282.8 million compared to $364.6 million a year earlier, with attendance at 10.7 million versus 15.0 million for the first three months of 2019.
In its quarterly press release, management spoke of the “unique and unparalleled times” for the industry and for CGX, saying that the company has been focusing on immediate cash and expense mitigation strategies, growing its online business, gaining support from government, landlords and supplier partners and continuing to meet the conditions of its proposed takeover by Cineworld, which has since called off the deal and prompted legal action from Cineplex.
On its plans to reopen theatres across the country, currently underway, Cineplex said that along with abiding by government regulations and the availability of first-run film product the company will enact pricing and marketing strategies so as to entice theatregoers back to the seats. So far, the company has opened its Rec Room facilities in Winnipeg, Calgary and Edmonton along with six theatres in Alberta, while select theatres in BC, Saskatchewan, Quebec, New Brunswick, Nova Scotia and Newfoundland are set
to happen on July 3.
“As of today, we are in the early days of our reopening process. While it is impossible to predict how long this crisis will last and how significant the impact will be on our business, we know guests miss the magic of the big screen and sound, and have a new appreciation for shared experiences with friends and family that can't be replicated at home,” wrote CEO and president Ellis Jacob in the press release.
On the quarterly numbers, Goff said the Q1 top and bottom lines would have been largely to trend if it weren’t for COVID-19, while the analyst also noted that Cineplex took a write-down of $173.1 million, saying, “the forced closures were seen as a triggering event for reassessment of long-lived assets and goodwill for impairment.”
“We are retaining our ‘Under Review’ rating given the significant uncertainty around COVID-19 and potential outcomes from legal pursuits. Our rating considers both the current enterprise valuation at $1,178 million and the range of plausible scenarios for operations and legal avenues,” Goff wrote.
“We further consider that Q420 consensus adj. EBITDA expectations that are generally grouping around $52.2 million against $106.5 million in Q419 reflect a relatively strong return of patrons. Where the expectations for CGX’s operating recovery leave potential downside, assessing potential legal outcomes that include aggressive recovery scenarios take on greater importance,” he said.
On the Cineworld deal, Goff commented that Cineplex management claims that it was fully compliant with the terms of the deal and it believes that Cineworld did not push the process forward with Industry Canada as it was required to do by the terms of the agreement.
“Investors will focus on the statement that Cineplex had $664 million drawn against its credit facilities exiting the quarter down $1 million from March 31, 2020. It was a condition of the Cineworld offer that Cineplex stay within $725 million; thus, it will be important for future claims to note that it was compliant,” Goff wrote.