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Cineplex Draws Investors as Beer Draws Viewers

Cineplex Inc. (CGX), the operator of 70 percent of Canadian movie theaters, is forecast by analysts to advance beyond a record as acquisitions and the addition of in- seat liquor service increases revenue.

Cineplex soared 96 percent since the end of 2007 to an all- time high of C$33.84 on Feb. 7 and has outperformed the Standard & Poor’s/TSX Composite index for six straight years. The Toronto-based company has prospered as it consolidated its hold over Canada’s moviegoers, most recently with its acquisition of AMC Entertainment Holdings Inc.’s loss-making Canadian theaters.

“Investors are willing to pay a premium for Cineplex, recognizing the lower competition in the Canadian market, the track record of management, and a disciplined and successful acquisition strategy,”said Robert Goff, an analyst at Byron Capital Markets. (QGCM)

The shares rose 1 percent to C$33.44 at the close today, a night after Ben Affleck’s “Argo” won best picture at the 85th Academy Awards in Hollywood.

In 2005, Cineplex acquired Famous Players from Sumner Redstone’s Viacom Inc. (VIAB) for C$500 million ($487 million), which was Canada’s top-grossing movie theater chain at the time with 81 locations and 787 screens.

Because it operates seven out of every 10 screens, leaving it less room to expand in the country, Cineplex has been forced to innovate, said Goff, who rates Cineplex a buy and has a price target of C$35 on the stock.

“There isn’t the ability to buy a significant chain in Canada, so there’s a modest outlook for growth in that way,” he said. “Instead, growth is about increasing premium revenue.”

VIP Service

Cineplex has rolled out its VIP Cinemas project in seven locations across Canada, including Toronto, Edmonton and Winnipeg, Manitoba. Customers pay extra for admission restricted to adults, wider seats, flip-up tables, and a special food menu that includes appetizers and entrees. A selection of alcoholic beverages is also available both inside the auditorium and in a private lounge.

Cineplex profit more than doubled last year to C$121 million. Net income of C$111.3 million is projected for 2013, according to the average of three analysts’ estimates compiled by Bloomberg.

“We like the stock, we’re buying it for our income-seeking clients,” said Kash Pashootan, an Ottawa-based portfolio manager with Raymond James Ltd. who manages C$125 million. “Their cash flow puts them in position for a potential dividend increase.”

Concession Sales

Cineplex last increased its monthly dividend in May, to 11.25 cents a share from 10.75 cents. The dividend yield in the past 12 months has been 4 percent.

Cash flow from operations has risen 23 percent since 2010, to C$179 million at the end of 2012 from C$146 million, according to data compiled by Bloomberg. The company’s cash flow is about three times greater than its peers in the S&P/TSX Consumer Discretionary index, Pashootan said.

Attendance jumped 7.8 percent to a high of 71.2 million people in 2012, while concession sales climbed 13 percent to C$329 million for total revenue of C$1.1 billion, the company said in its fourth-quarter earnings on Feb. 7.

Pashootan sees a further 15 percent gain for Cineplex shares due to its success drawing patrons to its venues and convincing them to spend more through its Scene card loyalty program, upgraded digital screens and audio, and premium services.

Sporting Events

Cineplex Chief Executive Officer Ellis Jacob said he expects growth over the next five years to come primarily from the company’s newer businesses including its online cloud sales service, introduced late last year. He is also pushing its media signage business, which accounted for C$85 million in sales in 2012, to become the market leader.

“A number of our businesses are in their infancy now and will continue to build up,” Jacob said in a telephone interview from his Toronto headquarters. “Loyalty, alternative programming, sporting events, these are all value assets. None of our large U.S. competitors own these assets anymore. They’re in the movie and food business, that’s it.”

The company would consider acquisitions in English-speaking countries, said Pat Marshall, a spokeswoman for Cineplex. In the meantime, Cineplex is focused on expanding its existing businesses in Canada.

‘Expensive Stock’

Blockbusters have also played a role in Cineplex’s recent success, with a resurgence in superhero films such as “The Avengers” and “The Dark Knight Rises” leading box-office grosses for the chain in 2012. “Skyfall,” the latest installment in the James Bond franchise, accounted for 15 percent of Cineplex’s fourth-quarter box-office receipts. It won Oscars for best song and sound editing last night.

Films scheduled at Cineplex’s cinemas include the sci-fi film “Oblivion,” starring Tom Cruise, and the Steve Jobs biopic “jOBS” starring Ashton Kutcher.

Some investors say they’re wary of Cineplex because of its price.

“It’s an expensive stock,” said Bob Decker, who helps manage C$6 billion from Toronto at Aurion Capital Management Inc. “It’s an excellent story, just you’re paying up for it and I don’t see the growth rate supporting the valuation that’s accorded to the company. We’ve got such a scarcity of non- resource growth stories that many of them get extremely overvalued.”

Streaming Services

Cineplex has a share price-to-earnings ratio of 19.8, higher than the 15.6 of Regal Entertainment Group (RGC), the largest U.S. cinema chain, Cinemark Holdings Inc. (CNK)’s 15.7, and all but three of the 18 companies in the S&P/TSX index of consumer discretionary stocks, as of Feb. 22.

U.S. theater chains have run into difficulties because they have had to rein in growth after overexpanding on cheap credit five to 10 years ago, said Ben Mogil, an analyst with Stifel Nicolaus (SF) in Toronto. He has a hold rating on the stock.

“The U.S. market simply got overbuilt, like everything else in the U.S from 2003 to 2008, and we didn’t,” he said by phone.

Cineplex’s revenue climbed 24 percent last quarter to C$299 million from a year earlier. Regal’s sales rose 18 percent to $723 million and sales at Cinemark gained 14 percent to $611 million.

The introduction of online streaming services such as Netflix Inc. (NFLX), which allows consumers to watch television shows and movies at home, has also not held Cineplex back, Aurion Capital’s Decker said.

Gerry Schwartz

“There are still people who want to go to the movies. They just had to re-tool the product offering to attract the right clientele,” Decker said.

When Onex Corp. (OCX) sold its stake in Cineplex in 2009 for C$184.6 million, investors questioned why they should buy into the company, Jacob said. Once he explained his plan, they dumped their holdings in U.S. chains and bought Cineplex.

“Four years ago when Onex exited, the stock was at C$14,” Jacob said. “Now it’s C$33. I see Gerry Schwartz and every time he says to me, ‘Thank goodness I kept my personal stake.’”

Schwartz, chairman and CEO of Toronto-based private equity firm Onex, said, through an assistant, he “owns a very substantial personal shareholding” in the company.

To contact the reporter on this story: Hugo Miller in Toronto at hugomiller@bloomberg.net

To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net

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