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February 22, 2007
Regal Enterainment: Post National Cinemedia Update Looks Good
Regal Entertainment (RGC) completed an SEC filing detailing the impact of the IPO of National Cinemedia (NCMI). The filing supports my bullish view of RGC which I believe offers a 15-20% total return opportunity over the balance of 2007. I expect to earn most of this return between now and the end of May as investors look ahead to the great lineup of blockbuster films this summer starting with the third films in the Spiderman, Pirates of the Caribbean, and Shrek franchises. Risk-reward is especially favorable for RGC as downside is supported by the $1.20 annual dividend which equates to a 5.5% current yield.
Northlake's initial purchases of RGC were made about 11 months ago and have produced a total return of 13%. This is slightly under the 20% total return CAGR for RGC shares since they came public in 2002. I expect a return to the historical return profile to occur in 2007 as investors realize the poor box office performance in 2005 was cyclical, not secular.
In its filing, RGC stated that it will receive $445 million in after-tax proceeds as a result of the NCMI IPO. This works out to a little under $3 per share. Twice in the past, RGC has paid large special dividends to shareholders and I expect that to occur again....
On its 4Q06 conference call, RGC indicated that a decision would be made soon on how to use the NCMI proceeds. A special dividend, debt reduction, and acquisitions were each mentioned but based on comments about management's comfort level with the pre-NCMI financial profile, I think odds heavily favor a special dividend of at least $2 per share.
The filing also outlined the ongoing impact of NCMI on RGC's financial performance. NCMI will contribute about $37 million of EBITDA to RGC in 2007 composed of (1) attendance and screen based payments by NCMI to RGC for the right to show advertising in RGC theatres, and (2) an equity pickup due to RGC's continuing 22.6% interest in NCMI.
The change in ownership of NCMI makes 2007 comparisons for RGC tricky. In 2006, RGC earned EBITDA of $535 million of which NCMI contributed $70 million. RGC owned 40-50% of NCMI during 2006 and the accounting treatment was different.
In 2007, based on 1.5% attendance growth, a 3% increase in ticket prices, and an increase in film rental costs due to more blockbusters, I think RGC will produce EBITDA of about $525 million. This is in line with $520-540 million guidance discussed on the conference call.
Backing out the NCMI contribution from 2006 and 2007, leaves theatre level EBITDA at $487 million in 2007, up 5% vs. 2006. This is the relevant growth comparison in my opinion. I believe my assumptions for 2007 may prove conservative. At a minimum, I think that in late April and early May, investors will be anticipating stronger financial performance due to the film slate which will lead to a pop in the shares.
Turning to valuation, RGC is currently trading at 8.6 times 2007 estimated EBITDA including the cash proceeds of the NCMI IPO and the ongoing NCMI EBITDA contribution. Given where other media stocks trade and the fact that RGC does not control the product that its business is based upon, I think this multiple is about right.
However, this valuation understates the NCMI impact on RGC's share price. NCMI is trading around 16 times EBITDA on its own, almost twice the level of the NCMI contribution embedded in RGC. If the NCMI EBITDA contribution were valued at 16 times EBITDA, an additional $318 million, or $2 of value, would accrue to RGC shares.
Another way to look at it is RGC's ongoing 22.6% interest in NCMI is valued at $621 million based on yesterday's NCMI closing price yet just $318 million of value is embedded in RGC's price from the NCMI EBITDA contribution.
Since my analysis of RGC's value calling for a 15-20% total return EXCLUDES the hidden value of the NCMI ownership, I feel even more strongly about staying long RGC at current prices.
Posted by Steve Birenberg at February 22, 2007 08:01 AM in RGC
THE MARKET AT APPROX. 3 O'CLOCK TODAY TEMPORARILY DROPPED MORE THAN 550 POINTS WITH ALL 30 DOW STOCKS IN THE RED AND WITH MORE THAN 200 POINTS OF THE DROP HAPPENING IN LESS THAN ONE MINUTE.PERSONALLY,I FEEL THAT THE MARKET IS NOT IN THAT BAD SHAPE AND I WOULD GUESS THAT THE MARKET CORRECTION SHOULD,CONSEQUENTLY, LARGELY UNDO ITSELF IN APPROX.1WEEK.
HOWEVER,THE DROP TODAY DEFINITELY GAVE THE IMPRESSION OF TRUE PANIC SELLING DRIVEN BY A COMPLETE LOSS OF REASON. CETV,MICC ETC. HAVE SO FAR HUNG IN THERE WELL .AT WHAT POINT,HOWEVER,WOULD YOU CONSIDER THE PANIC SO PERVASIVE AND A FURTHUR DROP IN STOCK PRICES SO LIKELY THAT YOU WOULD CONSIDE SELLING ALL OUR MEDIA STOCKS?
There is no point short of a nuclear bomb attack that I would consider selling all our media stocks. I am a long-term investor and do not beleive the ned of the world is at hand.
I'd also note that when the Dow dropped 200 point sot down 540 points the NASDAQ, S&P 500 and Russell 3000 did not drop nealry as sharply. Down 400 is still ugly but that one minute plunge was just a screw-up in tradingof futures or something, IMO.
The uptrend since last July is now clearly broken. It iwll take time to reassert itself. There is not need for anyone but the most aggressive trader to worry aobut jumping in to catch trade. The first bounce will fail and then the market will go lower than it closes today with much less emotional selling and lower internal measures of downward pressure. That will be the time to buy and it might come in 2-6 weeks.
Posted by: at February 27, 2007 03:00 PM