Cineworld: Good Value, Well Managed Business

Wednesday’s Capital Markets Event highlighted: (1) new marketing and advertising opportunities presented by digital, which has finally arrived; and (2) that Cineworld’s (CINE.L) growth plan (a 30% increase in sites over five years) remains on track and should deliver a significant uplift in EBITDA. Q4 trading looks extremely strong and the 2013 film slate also appears promising. A 2012 EV/EBITDA of 6.8x, P/E of 12.1x and yield of 4.9% looks good value for a very well-managed leisure business.

Digital has (finally) arrived
By next year, 40% of bookings should be online (helped by the recent removal of the booking fee) or advance (strong growth in ‘Unlimited’ subscribers). CRM/online marketing opportunities are already much improved and foyer space will be freed up as the percentage moves towards a target 60%. This can be used to improve dwell time and spend through new retail initiatives (eg the Starbucks trial) or with touch-screen devices for an interactive experience for customers (and a targeted marketing opportunity for distributors). All Cineworld’s 818 screens are now digital, allowing much more flexible content and freeing up capex for site expansion (conversion costs will continue to be recouped from film distributors over the next seven years). Cinema advertising has also just gone digital, providing much more flexible and targeted opportunities (eg 90,000 playlists per week versus 3,000 previously).

Acceleration in new site developments
Cinema has long been considered a cornerstone for leisure developments and Cineworld’s strong balance sheet (June net debt £99.2m, 63% gearing) puts it in a strong position versus its two main private equity-owned rivals, Odeon and Vue. Thirteen of the target 25 new sites are already contracted.

Very solid financial track record
The economy has put pressure on admissions, retail spend and advertising, but despite this Cineworld has delivered solid growth. It confirmed in its 13 November IMS that despite a lacklustre Q3 (Olympics), it expects to meet full-year forecasts (4% EBITDA growth), helped by a very strong Q4 film slate, including “Skyfall”.

Valuation: Good value for a very well-managed business
Cineworld shares are up 20% since the start of 2012, but have marked time over the last three months and the 2012e EV/EBITDA of 6.8x looks good value.

To Read the Entire Report Please Click on the pdf File Below.