Regal Entertainment Group: Here’s What to Expect in the Future

The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

Regal (NYSE:RGC) revenue beat our Street-high expectations driven by attendance and other operating revenues. Revenue was $723 million, compared with our estimate of $715 million, and the consensus estimate of $706 million. Adjusted EBITDA was $152 million, compared with our estimate of $154 million and consensus of $139 million. EPS was $0.24, in line with our estimate, compared with the consensus estimate of $0.21. The company once again did not provide forward guidance.

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The earnings upside was attributable to several factors. Admissions revenue per screen was ahead of our estimates driven by slightly higher attendance on a lower-than-anticipated screen count, and roughly in line with the industry despite the acquisition of 301 theaters contributing only one month during the quarter. Excluding the December acquisition, Regal outperformed the industry by ≈ 150bps. Concessions per cap were up 3% y-o-y driven by improvements in beverage and concession volume as well as expanded menus in over 50 theaters. Earnings were in line with our estimate as higher rent expenses were offset by well-managed film rental costs and better than expected earnings from Open Road Films.

Fewer potential new theaters limits the opportunity for further cost reductions. Regal has reined in costs throughout most of the past several quarters as it closed underperforming theaters. As the company begins to add theaters, we expect…

rent expense and other operating expenses to rise. On a per screen basis, however, we expect Regal to manage these costs, allowing only slight expense growth as it grows its footprint.

Maintaining FY:13 estimates for revenue of $3.02 billion and EPS of $1.10, but lowering our estimate for adjusted EBITDA to $643 million from $646 million to reflect slightly higher general and administrative expenses and interest expense, offset by greater income from Open Road Films.

Q1:13 is tracking down 4% quarter-to-date, and will likely trend downward throughout the quarter. Q1:13 is up against a strong +22% comp that becomes progressively more difficult throughout the quarter (up 10% comparison in January, up 24% in February, and up 38% in March).  We expect a negative mid-single-digit comp in Q1.

Maintain our NEUTRAL rating and $16 price target. After accounting for Regal’s ownership stake in National CineMedia, we arrive at a $16 price target. This reflects a 6.3x EV/adjusted EBITDA multiple on our 2013 estimates, in line with its historical multiple and its peers, reflecting a stable business with high debt levels.

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Michael Pachter is an analyst at Wedbush Securities.