Author Topic: CGX - Cineplex  (Read 6708 times)

valueinvestor

  • Sr. Member
  • ****
  • Posts: 398
CGX - Cineplex
« on: June 19, 2020, 03:12:37 PM »
I just want to present an interesting idea that I have pondered for a while, hopefully you all can provide some insights, but for now - here's another of my ramblings.

A stock that was worth $34 on a take over basis, $22 prior to COVID-19 is on the market for $10.65 today.

It's one of those stocks that haven't been restored to their former glory, even though there are other industries with fewer legs to stand on that are almost back to normal on a price per share basis.

Do I think this situation will make them weaker in the long-run? No. Short term will be holding CGX hurt? Probably.

Unless we have an apocalyptic situation where people do not go to theatres anymore, markets are valuing this at $12-15M per theatre or $4M net of debt/lease obligations.

It's the best theatre play I know, as they have a virtual "monopoly" or rather no real competitor with an almost hidden asset, which is their SCENE points program that has 10 million members (to provide perspective, there's almost 40 million Canadians).

Bear Case:

Theatre attendance experienced a year-over-year decline, this is true, but again markets valuing Cineplex at $12-13M per theatre. These are best-in-class theatres in prime locations with a growing Food and Amusement business within them.

Streaming will kill them. I think there's going to be a situation where if you can't beat them, join them. Just like how Amazon is built physical stores, streaming companies may want to have theatres under their fold to enhance the customer experience. Does this automatically translate to downside protection - No - maybe they'll wait like Amazon, where they are only kicking the tires of AMC when it's close to bankruptcy.

Do I think it's a bargain at $10.65? No, because Cineplex increased their prices 10 fold over the last decade, and I think there will a reversion with attendance decline because of COVID-19. Do I think they're at risk of bankruptcy? No. Especially with the Canadian Government support, it's hard to see it happen. In the very least, their partnership with Scotiabank may help them.

The only thing that makes this a bargain is that they're the best house in the worst neighborhood. Hell, the market is pricing it less than the GFC.

So if we discount possible hope for a transformational partnership with a streaming partner, the inclusion of virtual/D-Box initiatives, closure of Mom and Pop Theatres, interactive, growing amusement/food business, what are these theatres worth on the public market? I think $12-$15M is fair for best-in-class theatres with prime locations.

What do I think the market is missing?

How much will a person pay for a loyalty program that has a quarter of the Canadian population on it that has useful data and integrated into an app? At $200 per member, you get the entire enterprise value. Generous? I don't know, just taken a look at the stock because simply it's the next annual report I'm reading.
« Last Edit: June 19, 2020, 03:16:04 PM by valueinvestor »


bizaro86

  • Hero Member
  • *****
  • Posts: 1470
Re: CGX - Cineplex
« Reply #1 on: June 19, 2020, 03:57:46 PM »
Seems like the sort of thing Fairfax would like. Short term economic distress is a cyclical and/or declining industry seems like their bread and butter. Plus the Recipe restaurants are already Scene partners.

In all seriousness, I think this might be a good recovery play. One thing that concerns me is a chicken-and-egg problem with new releases. Until lots of theatres are open and people come back studios wont want to release their big films. But without big films to draw people back, the recovery in attendance could stall.

I think their arcade business is an interesting one, and their stand-alone versions have started opening up already. I like this a lot better than US comparables because their market share is very high, although Landmark has actually been building new theatres from the ground up lately, which isnt great news.

roark33

  • Hero Member
  • *****
  • Posts: 767
Re: CGX - Cineplex
« Reply #2 on: June 19, 2020, 04:06:05 PM »
The slate for the rest of 2020 is really weak:

Tenet
Mulan
Black Widow
No Time to Die
Top Gun

But, lots of movies have been moved back to 2021.  Movie theaters will probably burn cash until at least november. 

I found this article useful regarding the theater slate (amc is the focus here)

https://seekingalpha.com/article/4354750-avoid-amc-entertainment-weak-movie-slate-will-strain-balance-sheet

valueinvestor

  • Sr. Member
  • ****
  • Posts: 398
Re: CGX - Cineplex
« Reply #3 on: June 19, 2020, 04:08:09 PM »
True.

Itís really ugly. No doubt about that.

I also think this a question whether the business survives or the assets? I am willing to bet theatres are not going to go extinct in the next ten years, but will cineplex the business exist in ten years.

Cineplex has enough liquidity imho, but is it worth holding long term relative to another opportunity.

Foreign Tuffett

  • Hero Member
  • *****
  • Posts: 1385
Re: CGX - Cineplex
« Reply #4 on: June 19, 2020, 05:54:02 PM »
A few things:

Makes much more sense to value cinema operators on a per screen basis, not a per theatre basis. Ignoring lease liabilities and their other assets, market is valuing each of their screens at about 563 or $563K USD. In a "normal" environment that would be cheap given the (apparent) quality of their locations, but obviously we are far, far from a normal environment. It is unclear to me what the future of the industry looks like, although I certainly don't think the entire industry will disappear.   

What's the latest on their debt? At YE 2019 they were 2.32X levered. Obviously they are going to breach the 3.75x covenant. You wrote "Cineplex has enough liquidity imho", but what makes you think that?

I wouldn't pay any attention to where the market was pricing this during the 08-09 financial crisis/Great Recession. Frankly, the industry is in worse shape than it was then. Also, cinemas have traditionally been quite recession resilient.

Former Teldar Paper Vice President

valueinvestor

  • Sr. Member
  • ****
  • Posts: 398
Re: CGX - Cineplex
« Reply #5 on: June 19, 2020, 06:01:53 PM »
A few things:

Makes much more sense to value cinema operators on a per screen basis, not a per theatre basis. Ignoring lease liabilities and their other assets, market is valuing each of their screens at about 563 or $563K USD. In a "normal" environment that would be cheap given the (apparent) quality of their locations, but obviously we are far, far from a normal environment. It is unclear to me what the future of the industry looks like, although I certainly don't think the entire industry will disappear.   

What's the latest on their debt? At YE 2019 they were 2.32X levered. Obviously they are going to breach the 3.75x covenant. You wrote "Cineplex has enough liquidity imho", but what makes you think that?

I wouldn't pay any attention to where the market was pricing this during the 08-09 financial crisis/Great Recession. Frankly, the industry is in worse shape than it was then. Also, cinemas have traditionally been quite recession resilient.



True. It makes more sense, I didnít really want to delve deeper on precise asset valuation. Weíre not Brookfield, where we can take advantage of a less than replacement cost investment without a vulture or two coming in to steal our meat.

As for liquidity, youíre right. But seeing the trend thatís going with Canadian companies, most are willing to lend and extend. So breaches are not treated the same, as they were last time.

Iím more interested in the cash-flow generated by the business and how to discount that and arrive to a value.

Asset-wise itís good. Business-wise, Iím not sure.

I think when the dust settles, Cineplex will be standing. But as a common shareholder, are we going to profit from that.
« Last Edit: June 19, 2020, 06:03:57 PM by valueinvestor »

samwise

  • Sr. Member
  • ****
  • Posts: 271
Re: CGX - Cineplex
« Reply #6 on: June 19, 2020, 06:18:49 PM »
Besides the current lockdown concerns, I have doubts about management.

At one point werenít they di-worsifying into restaurants and also had hopes of selling tickets with some future online movie download. Has capital allocation improved?

Scotiabank has the scenes card. Do you know itís market share? How does it compare to the Aeroplan cards biz of CIBC and TD, which were proven very valuable in the fracas between AC and AIM?

Disclaimer: I owned long ago, and management never seemed happy to run the cash cow business. They were always stretching for growth in a stagnant business. But itís distant memory now, so happy to hear anything new. The underlying business was quite good, since itís basically a monopoly. As long as there is a theatre window.

valueinvestor

  • Sr. Member
  • ****
  • Posts: 398
Re: CGX - Cineplex
« Reply #7 on: June 19, 2020, 07:03:02 PM »
I think itís more valuable? No?

One canít really possibly know, as Scotiabank or Cineplex doesnít break the scene card economics, but Scotiabank canít have this profitable relationship with anyone other than Cineplex, as they donít have any other option. Donít know the market share, but it should be considerable. There were only 5M Aeroplan members, as mentioned Scene has 10M.

Management has been ďEddie LampertingĒ the company for a while, but again they need to innovate. In terms of capital allocation, it maybe bad, but if they donít figure out a solution to get with the times, theyíll be dead like blockbuster. I never really disagreed with Lambert, but the business was tough. At least with Cineplex, even with this dire economic situation, they are not in a bad position as AMC.

At this moment, I donít think this is something where common investor can profit. Most likely will be an activist play such as Rosenstein with Whole Foods or strategic acquisition.

However as a Canadian, if someone told me I could own 10% of Cineplex for $67M CAD, I would be surprised.


roark33

  • Hero Member
  • *****
  • Posts: 767
Re: CGX - Cineplex
« Reply #8 on: July 14, 2020, 02:29:18 PM »
One interesting take on this movie industry currently is asynchronous global movie release.  WB has been heavily advertising Tenet as August 12/13 release date, but that seems highly unrealistic given CA and NYC current regulations.  WB could just go ahead and release Tenet and let the chips fall where they may over the course of a couple of months.  In this case, CGX would be in a great situation since almost all of their theaters could be open, whereas AMC with heavy large city US operations wouldn't do so well. 


valueinvestor

  • Sr. Member
  • ****
  • Posts: 398
Re: CGX - Cineplex
« Reply #9 on: July 14, 2020, 04:27:48 PM »
Yep! It's interesting for sure.

Especially with the release of Cineplex Unsecured Convertible Debentures @ 5.75% with Conversion Price at 10.94 IIRC.

Again the loyalty program is valuable - they own 50% and it's doing around 100M in revenues. Although it's losing money, I'm sure that will change when Recipe Unlimited and other partnerships start flowing through.

It's cheap, but I'm still wondering if this is the case where I get all the answers right and still get a C+. I was not a fan of the Cineworld/Cineplex deal.
 
« Last Edit: July 14, 2020, 04:31:29 PM by valueinvestor »