Cineplex: Mission possible after Avengers win

In addition to its 162 movie theatres’ (1,659 screens) box office business (a 79 per cent market share), Toronto-based consumer stock Cineplex Inc. also has large media and amusement gaming businesses, and is evolving into an entertainment destination play.

CineplexRescuing cyclical consumer stock Cineplex Inc.’s (TSX—CGX) 2018 second quarter, The Avengers along with other cinematic heroes were able to boost box office revenues. Cineplex reported a strong quarter for 2018, on the back of a strong film slate.

Toronto-based Raymond James Financial analysts Kenric Tyghe and Joanna Chmiel give this entertainment industry stock an ‘outperform’ rating but decrease their target share price to $36 from a previous $39.

“Cineplex’s second-quarter 2018 box office revenue growth of 12.4 per cent to $409.1 million reflected strong industry performance on key titles in the quarter. Box office revenue growth was supported by a five per cent increase in attendance and a 4.4 per cent increase in ticket.

“Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $67.8 million (a 613 basis point margin improvement to 16.6 per cent) reflected better-than-expected sales leverage on higher than expected revenues in the quarter. EPS of $0.38 came in well above consensus of $0.25.

“The solid performances of Ant-Man and the Wasp, Hotel Transylvania and Mission: Impossible – Fallout have driven quarter to date Canadian box office growth in excess of industry growth of one per cent. The performance quarter to date is incrementally positive in our opinion given that August 2017 was a disaster at the box office.

Q3 film releases should be solid hits

“The film slate in the third quarter is solid with the releases of Crazy Rich Asians, and the anticipated releases of The Nun, and The Predator set to release in the remainder of the third quarter of 2018. The very weak third-quarter 2017 performance was largely driven by an awful August 2017, and as such, we like the setup going into the back half of the quarter.

“While relative attendance growth in Canada (on a slate equivalent basis) is lagging that of the US (where traffic is being inflated by the Movie Pass effect), that we now have one more quarter of box office growth and another positive earnings surprise is, in our opinion, a positive. Further, we expect the relative box office performance (and the tracking error) to normalize and recent changes in the Movie Pass program to negatively impact US box office traffic.

“Lastly, while the strength of the box office performance was significant, we believe that the benefits from the diversification strategy were noteworthy. The margin performance continues to benefit from both recently announced costs savings, which are tracking to plan ($25 million in run-rate annual cost savings within 12-months), and more effective utilization of the SCENE loyalty program, which will continue to ramp through our forecasted window.”

This is an edited version of an article that was originally published for subscribers in the September 21, 2018, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

Investor’s Digest of Canada, MPL Communications Inc.
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