I used yesterday’s early weakness in the market and in the shares of Regal Entertainment (RGC) to initiate a meaningful though not quite full position. The headline numbers looked like a slight miss with EPS of 9 cents and revenue of $585 million against expectations for 11 cents and $602 million. EBITDA hit expectations, however, at $110 million, up 8%.
EBITDA benefited from a mix that favored high margin concession sales, strong per capita concession sales, better than expected film rental costs, and a decline in other operating expenses. These factors offset a 2% decline in attendance, which was worse than the flat industry performance, and a less than expected 2% increase in ticket prices. Average ticket price was $6.76. Overall, these results are consistent with a quarter that was strong for family films where concessions are higher but average ticket prices lower.
Theatre industry investors focus on EBITDA so I wasn’t that worried about the revenue and EPS miss. The press release indicated the $1.20 annual dividend is here to stay, which provides good support at a 6% current yield. Additionally, the shares have been picking up sponsorship as lots of folks are noting the big upturn in the April box office I wrote about earlier this week on Media Talk. I decided that the market would look past any hairs on the 1Q report with 2Q and 3Q shaping up very well due to a strong film slate that includes lots of family films and very easy comparisons….

Consensus EBITDA for 2006 is $545 million. Although I think it will trend higher over the next few months. Of that amount about $470 million comes from theatres with the balance from National Cinemedia. RGC owns 53% of National Cinemedia which sells in-theatre advertising and looks for other revenue enhancing opportunities.
RGC has 154 million shares outstanding so the market cap is $3.2 billion. Add debt of $2.0 billion and deduct cash of $156.6 million and total enterprise value is $5.1 billion. This puts the stock at 9.2 times EBITDA. Lots of analysts think National Cinemedia could be spun out and is worth a premium multiple. If it is worth 11 times, then the theatre EBITDA is valued at a little under 9 times EBITDA. This is about where several private equity deals have taken place for other theatre chains.
I don’t think RGC is particularly cheap but with dividend protection in place I think operating momentum and rising estimates can carry the shares higher. If the street gained confidence that EBITDA would grow again in 2007, then rolling the current EBITDA multiple forward would get the shares to $24. Free cash flow after everything including the dividend is almost $1.00 per share, so this could add further to the upside as debt paydown leaves more value for shareholders.
My current plan is to hold the shares into September. I will collect two dividend payments of 30 cents which along with $3-4 of potential upside in the shares, produces a total return of about 20%.