A few days ago, Reading International, Inc. (NASDAQ:RDI), owner and operator of movie theaters, retail and commercial real estate through cinema exhibition and real estate businesses, confirmed that RDI rejected an approach by a third party to buy the company for nearly $370 million, an 18-20% premium from current levels. Even though rejected, the recent offer is a good reiteration of the value and opportunity on offer, i.e. good and underappreciated assets on the books and an improving business on an operational level, a combination that should drive a decent value for the shareholders, whether the business is split or stays as one.
The stock has hardly done anything over the past year, as expected from a small-cap stock with negligible Street coverage and low liquidity, but now that various catalysts are assembling and investor interest is increasing, this might be a good time to take a closer look at the name again. Mark Cuban, one of the largest shareholders, has taken a role of an activist investor since last year, and the lawsuit filed by Whitney Tilson and Jonathan Glaser was withdrawn last week.
The small size of the business as well as the market cap may have its share of challenges, but the favorable dynamics of the cinema business, consistent performance, high quality of the assets on the books and exposure to Australia and New Zealand, geographies that are performing well, do position the business to continue to perform well. Looking at the stock trading at less than 15 times earnings, the market seems to be ignoring the improving fundamentals, leave alone the upside from any event that can unlock value for the shareholders, e.g. real estate sale.
High interest in the cinema assets
One of the biggest trends in the broader media & entertainment industry is the consolidation underway in the cinema space, especially the interest shown by the Asian players, mainly Dalian Wanda Group.
A few days ago, AMC Entertainment (NYSE:AMC) announced its intention to purchase Odeon & UCI Cinemas for close to $1.2 billion, including debt. The timing of the deal, less than three weeks after the Brexit, highlights the strong interest in the assets. Carmike Cinemas (NASDAQ:CKEC) is set to have a special shareholders meeting to vote on AMC's offer to buy the company, and as per some large prestigious shareholders, the value the assets can command is more than $40 per share, almost 30% higher than the current price for Carmike. Considering the price AMC paid for Odean & UCI, almost 9 times EV/EBITDA, which itself was significantly lower than the peers like Cineworld (OTC:CNWGY) and Kinepolis that are trading close to 11-13 times EBITDA, it seems the discussion over Carmike and its cinema assets may not be coming to an end any time soon. Even in the Australian market, where Reading has 141 screens, China's Wanda bought Hoyts Group last year, which has close to 400 screens across Australia and New Zealand.
Few will doubt that consolidation down the road should lead to better pricing power, but looking at the industry fundamentals, things have been improving for a while. The most recent data shows that the average ticket now costs $8.73, up from $8.58 during the first quarter and up 1.4% over last year.
Source: The Numbers
Over the past 10 years, the average ticket price has increased more than 33%, and the industry shift may only accelerate the move, including the renovation initiatives underway at most major players, including Reading International.
Cinema business: Fundamentals improving, but much more to follow
The momentum has turned positive, efforts to improve returns from existing assets are underway, initiatives to unlock value for the shareholders are progressing well and steady cash flows, as well as improved profitability, should accelerate the pace of value creation for the shareholders.
The cinema business, which contributes almost 94% of revenue, continues to grow at a mid-to-high single-digit rate and EBITDA at a significantly faster rate than that. The global cinema business, managed under brands like the Reading Cinema, Angelika Film Center, Consolidated Theatres and City Cinemas, saw growth of 8% last quarter, but operating income grew 21%, and the U.S. cinema segment operating income increased by 100%.
On top of the existing momentum, property updates and service enhancements should lead to an even better top-line growth and profitability. For e.g., late last year, Carmel Mountain theater in San Diego was renovated and rebranded as an Angelika Film Center & Café, with recliner seats and premium food & beverage offerings, which helped total revenue from the theater increase 170% over same quarter last year.
In the U.S., the food and beverage per capita, at $4.39, is close to the highest ever, but the roll-out of premium food and beverage menu, which includes gourmet burgers and craft beer, is just starting. The lease amendments at Consolidated Theaters in Honolulu and the Reading Cinemas in Murrieta, California, should allow full renovations, including luxury seating, high-end food & beverage menu and the company's branded large screen format auditorium - TITAN XC. The company's first ever IMAX theater at Bakersfield, California, has just completed the first full quarter of operations, and more installations of IMAX and other premium screen providers should boost revenues.
Real estate business: Key to unlocking shareholder value is found
In the U.S., some of the prominent properties owned by the company in Manhattan are City Cinemas 1, 2 & 3 on the Third Avenue, across from Bloomingdales, Union Square Theatre, Orpheum Theatre and the Minetta Lane Theatre. The company also owns almost 200 acres of land in Coachella, California.
Near term, accelerated progress on the development plans of City Cinemas 1, 2 & 3 and the Union Square Theatre may act as significant positive catalysts for the stock, given the real estate prices in New York. With approval for steel and glass dome and much of the other regulatory necessities in place, the start of development work on the Union Square Theatre, to be rebranded as 44 Union Square, should be relatively smooth. For the Cinemas 1, 2 & 3, it is easy to assume that the plan to redevelop into a mixed-use retail and residential building may be well accepted.
As for properties in New Zealand and Australia, the plan to transform the Newmarket shopping center, in the suburb of Brisbane, into an entertainment themed center and plans to add Supermarket at Courtney Central in Wellington, New Zealand are underway.
The valuation argument is probably the easiest to make. Currently, the stock is trading around 10-11 times EV/approximately $40-45 million EBITDA expected from the cinema business alone, which is not far off from where some of the recent acquisitions are getting done, and as covered earlier, the real estate portfolio owned by the company is impressive.
The stock is trading close to 2.2 times book value, but the book value, looking at the handful of assets mentioned above, seems understated. Indeed, Capstone Equities, in the letter sent in 2012, highlighted that the market value of the two properties, Union Square Theatre and Cinemas 1, 2 & 3, was more than three times the value on the books.
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