As our 'comrades' know, we had been bullish on motion picture exhibitors since Oct. '12 (yes, more than a year ago), when we recommended CKEC, CNK, and RGC. Although we did not post our thoughts regarding those companies on the blog, we have so-called 'witnesses'. As you can tell, at times, we like to brag. Recently, we have not had too many brag-opportunities. :)
The investment bankers and other investors finally jumped on the bandwagon this month as AMC Entertainment Holdings (AMC) came back to the secondary market after a lengthy absence with an IPO. Based on its S-1 filing, the Company sold approx. 18.4MM shares. The IPO price was at the low end of the $18 - $20 range ($18). However, the IPO was successful as the shares climbed 5% on Wednesday and an additional 3% on Thursday, closing at $19.49.
AMC is making the same pitch as the other big players in the space, CNK and RGC, have made - it is striving to make watching movies and other shows at theatres more enjoyable by basically making it fancier. All of these companies are spending money on providing more variety of foods and beverages and giving the 'homely' feel to the seats in theatres. They look to create an atmosphere where attendees go there for more than just watching a movie and eating some popcorn. Some 'premium' theatres have been built, and additional ones are on their way, which basically make going to a movie a 'fancy' and more expensive event. These strategies have worked as attendance has increased, along with average ticket prices (admission revenue per attendant) for most of the players in the space.
In addition to making it more enjoyable and expensive for consumers, these companies are making the entire movie distribution to thousands of theatres and screens much more efficient. Simply put, a type of a cloud-type system is being created for the big players (AMC, CNK, and RGC) to take advantage of the digital and 3-D content.
Of course, the main driver of growth in this business is quality of films - content is King. Content has certainly helped motion picture exhibitors the last few years. CKEC, CNK, and RGC have seen both top-line growth and margin expansion. So, as everything is flying high in the equity market and we are about to close the best part of the year for studios and exhibitors, AMC's timing was not that bad. For value investors like us, it may have been a bit late. But then again, the Company's intention is to raise as much capital as possible, and not necessarily to provide 'bargain' for potential shareholders.
Speaking of bargains, AMC's IPO was a bit unique as it allowed consumers that belong to its loyalty program, AMC Stubs, to purchase shares at the IPO price, $18, before the shares hit the market. We are assuming that management believes this will make the loyal customers loyal shareholders. The strategy is not only a 'sticky' one, but it also could bring in a small amount of recurring revenues as this loyalty program requires members to pay $12 every year to belong.
With all of this said, we thought to look at how the companies in this space are valued. In terms of potential top-line growth, high margins and further margin expansion, CNK stood out as it is more active in non-US markets, especially South America, than the other players. CKEC has also demonstrated strong growth, comparatively speaking; however, its margins are not very impressive. Although RGC has adj. EBITDA margins comparable with CNK, we note that a lot of it is due to much higher depreciation as a percentage of capex and opex. Unfortunately, AMC is at the low-end of the margin range among these companies. We tried to provide a more detailed picture of how these companies compare in the table below (click to make it larger):
As you can see, AMC has to improve its margins significantly to compete effectively with CNK and RGC. However, it is trading at a premium to all of the other companies (based on the EV/adj. EBITDA multiple). We also recommend looking at the companies' interest coverage ratio, debt/adj. EBITDA, and debt ratio, as they are all highly leveraged companies. From that standpoint, again, CNK stands out with interest coverage ratio above others', with lower debt/EBITDA and debt ratio. AMC, CNK, and RGC have pretty attractive dividend yields as their business does generate significant amount of cash.
So in terms of the EV/adj. EBITDA multiple, we think 7.5x forward adj. EBITDA is appropriate. Of course, some may require a slightly higher multiple given stronger balance sheet and a higher margin business, such as CNK. Others, such as CKEC, may require a slightly lower multiple, given lower margins, lower interest coverage ratio, and no dividends. Simply put, we now think these players in this space are trading at fair value ... fundamentally speaking. Of course, we cannot guarantee that they will not go any higher. The uber-exuberance we are seeing in the overall equity market, is out of our hands and as we are learning every day, it is becoming more and more inexplicable, from a fundamental standpoint.
Regarding AMC, we think based on our FY '14 adj. EBITDA estimate, it should be valued at around $17 per share. We also did a 5-yr DCF on AMC, which resulted in an $18.50 per share valuation. It appears that, from a fundamental standpoint, AMC should be valued at $17.75 per share. The estimates in the comp table are all ours.
