Description

Cineplex was written up by mimval in July 2020 (link) and afgtt2008 in May 2021 (link). Please see those write-ups for background. What’s changed since then? Nothing, and everything!

Thesis: 4 years later CGX is still a reopening trade. Earnings power is higher and yet CGX’s EV is 50% of where it was pre-covid. Sure the entire world has derated (unless you are an AI stock). But there is a lot of money to be made between here and pre-covid levels. Apart from improving fundamentals, CGX is also a very real takeout candidate.

Background: Right when the Box Office started to get momentum in Summer 2023, the writers & actors strike killed the slate in 4Q23-now. Summer 2023 and even 2024 (Dune: Part Two, Inside Out 2, Godzilla x Kong) shows you that if good movies are released, people will go. Bears will say “sure, but Barbie and Oppenheimer were one-offs.” Yes, Barbie was a big hit. But it was still only #11 all-time, and Inside Out 2 is currently tracking to be within 5% of Barbie. Oppenheimer was #82 in terms of Top Lifetime Box Office Grosses. My point being: there are great movies released all the time.

Management has used the lull created by the strikes to clean up the business. In late 2023 they sold a non-core games distribution business and used proceeds to pay down a chunk of the revolver. In early 2024 the company completed a comprehensive balance sheet refinancing which saw them issue Sr Secured debt with UoP going to take the bank revolver out and call the 2Ls. They also called a portion of the converts and extended/restruck the balance. This was an important move that was largely ignored by markets. CGX was on a 7th or 8th amendment of its credit line. Bankers had handcuffs on the company. With the banks now out of the way, CGX is able to institute buybacks, dividends and invest in growth.

The opportunity: Fundamentals are about to inflect and yet it feels like investors are looking in the rearview mirror. This is best evidenced by the fact that Cinemark is making 52w Highs (and is up 15% this week alone on Inside Out 2 success) and yet Cineplex is making 52w Lows. Historically, the 2 stocks have tracked each other pretty closely. That relationship broke at the beginning of 2024.

Movies are not dead. In 3Q23 CGX achieved 120% of 3Q19 EBITDAal (EBITDA after rent) on 90% of attendance. Management has said that they can achieve pre-covid EBITDAal on 75-80% of attendance and last year proved it. How is this possible? Pricing and cost efficiencies. But mostly pricing. Box office per person is ~+25% since 2019 and concessions pp is ~+40%. By moving the mix to more premium rooms (VIP: in seat dining/drinks) CGX and the industry has been able to flex pricing power.

In addition to the Theatre biz, CGX has a fast growing Location Based Entertainment (LBE) segment. Think of it as a millennial focused Dave & Busters (games and F&B skew to older demo). The business is currently ~15% of consolidated EBITDAal but has the runway to double. CGX has 13 Rec Room and Playdium locations. Box economics are very attractive at $10mm per location, $10mm auv and +25% margins = 4yr paybacks. CGX is building 3 more locations this year and believes that in time they can get to 30 locations.

The numbers: CGX’s balance sheet is comprised of $575mm 7.625% 2029 Sr Secured Notes, $216mm 7.75% 2030 Convertible bonds ($10.29/strike), an undrawn $100mm credit facility and $92mm of cash.

Pre-covid (and pro-forma the non-core divestiture) CGX generated $195mm EBITDAal. Since that time the LBE business has grown from 9 to 13 boxes and from $17mm EBITDAal to $36mm, so all else equal on a normalization CGX earnings power is $214mm. This crude math ignores pricing and the 3 LBEs under construction, and CGX recently disclosed that at 80% attendance (the new normal), runrate EBITDAal is $243mm. Once LBE is fully built out, that runrate increases to $278mm.

Lets focus on the $243mm because I don’t think market will pay for LBE upside. Maintenance capex is $30mm, growth capex this year is $50mm (3 LBEs at $10mm each + Theatre upgrades to premium offering) and cash interest is $61mm. Covid gave CGX a lot of NOLs, so cash taxes aren’t a problem for a number of years.

In my view, Maintenance capex is probably $50mm because if we are being realistic, those room upgrades to premium offerings are part of running a Theatre business. On those numbers, CGX should generate $132mm of normalized FCF and ~$100mm after all capex. It should also be noted that while CGX is building 3 LBEs in 24, that number drops to zero next year because they have yet to sign leases on future expansions (searching for the best sites).

The Value Proposition: With everything laid out above, CGX is a $450mm mcap company and $1.15bn EV. Normalized numbers put it at 4.7x EV/EBITDAaL and a 30% FCF yield.  Balance sheet is ok at 2.9x and should de-lever rapidly.

Pre-covid CGX was a +$2bn EV and traded at 10x. Part of that was everything had higher multiples in a ZIRP world, the other part was that CGX was an ex Income Trust and had a nice dividend that attracted yield hogs.

What’s the right multiple now? CGX has 75% market share and the business has a lot of pricing power. 6-8x EBITDAal for that doesn’t feel egregious. At the low-end that’s a $11.50 stock and at the high end its $17.50. This rough math ignores any equity accretion from FCF generation, which is roughly $1.25/sh annually after all capex. (numbers are based on fd share count, i.e convert is out of the way).

The Darkhorse: M&A. Simply put CGX has and always will be a takeout candidate due to its market share and strong FCF generation. The company agreed to be acquired by Cineworld in Dec 2019 at $34/sh ($2.8bn EV) but that deal ultimately blew up due to covid. In the circular it was disclosed that 2 other parties were also looking at CGX, one of which had approached the company in 2018.

Flash forward to the present. In Dec 2023 Bloomberg reported (link) that Kinepolis (KIN BB) was looking at acquiring CGX but decided not to due to competition reasons (KIN already has ~15% market share). It went on to say that they would consider an acquisition if they could partner with someone. A few weeks later the same reporter had a story (link) saying the ex Cineworld founders were looking to get back into the biz and that Canada was an area of focus.

If you listen to KINs conference calls and public materials they are pretty clear that they are on the hunt for acquisitions. They go as far as saying they’ve booked plane tickets and even made some offers (1h53 of this video https://vimeo.com/938557699?share=copy)

Bottom line: Movies are coming back. Summer 2023 showed you that if good movies come out CGX can in fact earn more than it did pre-covid. With the box office about to normalize CGX is trading like its going out of business. Meanwhile US comps are at 52w Highs. CGX is too cheap and with the M&A history and news stories it seems like one way or another the stock is set for a re-rate.

Catalyst

-Box office

-M&A candidate

-Dividends & buybacks