Description

AMC Summary

AMC Entertainment operates the largest circuit of movie theaters in the United States, Europe, and the world. Theatrical distribution is a misunderstood, often-doubted industry that is in fact a durable, quality business. In my opinion all the exhibitors are likely solid medium-term investments, but AMC has the greatest idiosyncratic opportunities on which to capitalize in the short- and medium-term.

On top of that, the recent dislocation in AMC shares looks technical rather than fundamental, with AMC down almost 30% year-to-date while almost every other exhibitor worldwide is up in 2017. Any attempt to undermine an AMC investment case (and explain the large drawdown) with an industry-wide thesis fails if it does not explain why Regal and Cinemark (among others, globally) are year-to-date winners.

It is worth reading mimval's writeup on CKEC and the message board to understand sources of accretive value from all three recent M&A transactions that have essentially doubled AMC's size and will be low-hanging fruit to drive EBITDA growth in coming Q's.

I believe AMC can realistically double within a year and perhaps triple in three years.

Background

AMC was historically a domestic theater circuit, the second largest in the United States. It was purchased by Wanda Group in 2012 and brought public again in late 2013, though Wanda still controls the company through supervoting shares.

AMC’s strategy is to premiumize the theater experience and grow their scale globally. They are spending a large sum of growth capex to upgrade their theaters, primarily deploying recliner seats in a targeted 60% of their footprint (they have about 35% of legacy theaters deployed already). The company has repeatedly stated this capex generates well above their 25% IRR hurdle rate, and I have no reason to doubt this is true as all other exhibitors have echoed the immense returns of recliner seat deployment. They have also upgraded their concessions in terms of quality and purchasing experience, helping drive per patron concession spend up at a 5-6% CAGR for the last few years as they take price, offer higher end products, and increase take rates.

In the last twelve months AMC purchased three companies, growing from the second biggest circuit domestically to the largest in the USA, Europe, and the world. These chains included Carmike (the fourth largest domestic circuit), Odeon (the largest in the UK and mainland Europe), and Nordic (the largest in Scandinavia).

Thesis

AMC is operating in a steady industry that, despite decades-long rumors of its demise, grows cash flows by increasing monetization per patron faster than the very, very slow pace at which it is secularly losing patrons. Most people are surprised to learn that since 2000, despite all the new in-home entertainment offerings that came out over that period (HDTV, Blu-Ray DVDs, Netflix, etc.), the 17-year CAGR of attendance declines in US moviegoing are less than 1% per year. With ~2-3% annual ticket price increases and ~5-6% better food and beverage spend per patron, it is not hard to see how AMC can still achieve ~3-4% “same-store sales” over a long period of time. The mostly fixed cost nature of the business translates this revenue growth into HSD EBITDA growth, and the financial leverage turns that into significant growth in free cash flow to equity.

At the moment, this economic model is even more exciting than usual, as AMC is deploying an enormous fraction of this free cash flow into the recliner initiatives which are returning well above their cost of capital. They have this opportunity domestically for probably two more years, and then can turn attention to Odeon, a formerly private equity-owned circuit which, by all accounts, was criminally underinvested and should have great opportunities to pick low-hanging, first-mover fruit.

While many sell-side analysts have taken down multiples recently to the lower end of historical ranges, I feel the company has perhaps its best ever opportunities for excess returns from capital deployment, and should therefore deserve the higher end of its historical multiple range.

Valuation

At their series of investor days earlier this year, the company revealed it did $887mm in pro forma 2016 EBITDA, including all acquisitions except Nordic. Including Nordic, adjusting for the year-on-year decline in the GBP (which impacts Odeon’s EBITDA in translation to USD), and removing their NCMI distributions, I come to almost exactly $900mm of true PF 2016 earnings power for the underlying business.

The company laid out a long-term target of 8-9% EBITDA growth at IPO, but the dramatic acceleration of high-returning growth capex should help them beat that figure in the near-term.

As a result, without taking any view on box office, I believe that the company can easily meet and likely exceed its long-term 8-9% EBITDA growth targets that have been laid out since IPO. Two years of 12% EBITDA growth takes 2018E EBITDA to $1.13bn.

Historically, these businesses have traded in a range of 7.5-8.5x EBITDA. As stated, I feel the high-return growth capex opportunity makes this perhaps the best forward-looking opportunity to own theaters in a long time, so I use the high end of this range, 8.5x for the domestic businesses. Approximately 30% of the business is in Europe today, where all the public comparables trade for >11x EBITDA. I take 11x for the European business. Blended, this comes to 9.25x.

9.25x on a $1.13bn EBITDA figure comes to $10.5bn in EV. Net debt today is $4.6bn, leaving $5.9bn for equity, which on 131mm shares comes to $45 per share, or 80%+ upside from today’s levels.

Catalyst

Technical overhang should dissipate as new shareholder base gets reestablished

While thesis isn't reliant on box office view, we do expect a strong 2017 slate to eliminate fears of secular transition away from exhibitors