The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
Q1:13 box office ended down 12.4 percent year-over-year due to a quiet release slate and a difficult comparison. For Regal (NYSE:RGC), whose quarter ended on March 28, Q1 box office ended down ≈ 10 percent. Q1 was up against a strong +20 percent comp that became progressively more difficult throughout the quarter. January ended down 0.6 percent, led by late-December Oscar-nominated releases.
February ended down 24.6 percent due to a particularly quiet release slate. March ended down only 12.3 percent despite a difficult comparison of up 38.1% from last year’s release of The Hunger Games. Both March and Q1 were led by Oz: The Great and Powerful.
Regal completed its acquisition of 43 theaters, including 513 screens on April 1, for $191 million in cash and $47 million of assumed lease obligations. We learned that, similar to Regal’s existing footprint, the acquired theaters are roughly 40 percent 3D-capable. However, they currently do not contain IMAX (NYSE:IMAX) screens. While there is potential to build out IMAX screens throughout the acquired footprint over time, our model conservatively reflects no additional IMAX screens.
We calculate the concentration of total box office within the top 10 films in Q1 to be roughly flat year-over-year, suggesting stable film rental margins. With that said, the concentration of total box office within the top three films in Q1 is about 200 bps lower y-o-y, so we modeled film rental costs down slightly y-o-y. We believe concession costs will be roughly flat y-o-y in Q1, rising slightly in 2013.
We are revising 2013 estimates for revenue to $3.08 billion from $3.02 billion vs. consensus of $3.02 billion, for adjusted EBITDA to $616 million from $643 million vs. consensus of $573 million, and for EPS to $0.98 from $1.10 vs. consensus of $0.99. Our revised estimates reflect lower Q1 box office offset by the Q2 acquisition, higher G&A in Q2 and an upward adjustment to our other operating costs assumption for the full year…
We are initiating 2014 estimates for revenue of $3.23 billion vs. consensus of $3.18 billion, adjusted EBITDA of $667 million vs. consensus of $602 million, and for EPS of $1.12 vs. consensus of $1.09.
Maintain our NEUTRAL rating and raising our price target to $17.50 from $16 to reflect our new 2014 estimates. After accounting for Regal’s ownership stake in National CineMedia (NASDAQ:NCMI), we arrive at a $17.50 price target. This reflects a 6.4x EV/adjusted EBITDA multiple on our 2014 estimates, in line with its historical multiple and its peers, reflecting a stable business with high debt levels.
Michael Pachter is an analyst at Wedbush Securities.
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