Movie Theatres

[Packer16]

I was looking for a cheap companies and came across Carmike (CKEC) and Reading Intl (RDI).  Both are selling for less than 5x FCF (3.3x for CKEC and 4.5x for RDI).  CKEC was brought out of bankruptcy by Leucadia a few years back and has more leverage than RDI @ 4.8x EBITDA.  RDI is also interesting becasue they also do real estate development and have exposure to Australia and New Zealand.  Both are at significant discount to the 2 largest chains Regal and Cinemark @ 10x FCF.  

 

The one thing that surprised me is the amount of FCF these firms are making with what I have observed are basically empty theatres at least around here.  These firms have mid to low teens EBITDA margins and rising revenues.  The revenue growth is due to popular movies and 3-D showings.  CKEC has already upgraded all of its theatres to digital and many of its theatres to 3-D.  RDI is about 50% digital and 3-D.  Has anyone looked at these?  TIA.

 

Packer

[Grenville]

Hi Packer,

 

I took brief look at Carmike the other day and wanted to get your thoughts on a few things that worry me given that the thesis will take time to play out.

 

+ Carmike looks to generate good operating cash flows, but management is keen on expansion at the tune of 22mln a year or so (limited by debt covenants) to build out to 3,000 screens. This drops the FCF yield.

+ Looking at the Q3 2010 report for the first nine months 173,500 options and 134,500 restricted stock were granted. The share issuance is at a 3% run rate per year which will add up over time to eat into owner earnings.

+ Management stated on the recent call that they would like to keep debt at 200mln and use free cash to expand, pay down debt (to 200mln), or pay a dividend. They would prefer not buying back stock as the float is low at 13mln.

 

positives

+ The ceo is buying stock in the open market

+ Their revenues seem to have held up well over the rough economy

+ Leucadia director on the board and buying shares in open market

+ 30mln cash payment from screenvision for 30yr contract

 

I have a very limited understanding of the industry and carmike. It seems like one would need to hold over the long term for the thesis to play out as FCF will stay low as the chain expands.

 

 

[Myth465]

I am a big fan of RDI, I plan to look into it a bit more but may take a position sooner or later. I also like Carmike.

[Packer16]

In terms of options if you look at the average over the past 3 years it averages like 2.2%.  In addition some of the options have performance conditions (see the 2010 Proxy - DEF14A).  The option grant #s are in the historical 10-Ks. 

 

They do appear cheap when compared to the other operators as the MVIC/Unlevered FCF (FCF plus interest expense) is 4.9x for CKEC versus 10.4x and 8.8x for Cinemark and Regal and 7.7x for Reading.  But Reading does have RE development (which I don't know how to value). 

 

Packer

[Myth465]

I figure Redding will get at least book value for the Melbourne property. They are also selling into a strong market with low cap rates, and prior to a collapse. Its a nice option because they may get 1.1 - 2.0 BV. It will shrink the debt, remove some of the hard to value assets, and allow them to develop the other properties. I think its a nice move .Also been open sense May so I figure a sell should be announced sooner or later.

[Myth465]

I have taken a position in RDI. There are plenty of good writeups on seeking Alpha. What has changed in my opinion is Management is communicating more and is in my opinion working on unlocking the value embedded in the NYC and Melbourne assets. My theory is if you subtract out a conservative value for the realty, you get the cinema business for free or cheap.

 

Thanks Packer.