CineWorld's Latest Update

[Speed]

For those interested in how some of the corporate cinemas are doing financially:

Subject: Cineworld (Buy, 262p FV): Managing the movie experience

Cineworld (Buy, 262p FV): Managing the movie experience
Cineworld’s share price has been relatively weak since the beginning of the year primarily due to a lacklustre movie schedule. The summer schedule has now picked up. The risk from the premium VOD offering is real, but in our view, manageable although exhibitors must ensure the cinema remains a value out-of-home leisure experience. Medium term opportunities exist in increasing advertising revenues and cost savings through digital optimization. Favourable debt facility renegotiation also helps. We see value in Cineworld trading at 6.5x 2011E EV/EBITDA and a 5.6% dividend yield. We maintain our Buy recommendation and raise our FV to 262p (255p).

The investment proposition holds

• Near term movie momentum is back: This year had a scheduling anomaly with H1 blockbuster release schedule shifted to the summer. Consequently, Cineworld’s Box Office (BO) revenues over January-May were down 7.8% yoy. The movie release schedule has now picked up with Pirates of the Caribbean 4, followed by Hangover 2 and Kung Fu Panda 2. The main release of the year is the last of the Harry Potter series in July.
• VOD service: There are structural concerns as Studios are trialling a premier VOD rental service in the US, which offers movies for $30, 60 days after release instead of 120. DVD release windows have reduced from 160 to 120 days over 2002-2010, but we note that the impact on UK cinema admissions and collections has been minimal as 70-90% of exhibition revenues come within the first four weeks of release. The challenge lies in exhibitor’s ability to ensure they are viewed as a viable out-of-home entertainment option.
• Ticket price increase: Cinema revenues will depend on BO performance. For FY11, we are expecting Cineworld’s BO revenues to rise by 10%, with average ticket prices increasing by 5% yoy, supported by the step change in its Unlimited Card subscription (from £13.5 per month to £14.99) in April and weak H2 comparatives. Weak World Cup and H2 2010 comparatives support admissions. In the medium term, we see additional revenue from the increase in 3D movies releases (2011E: 34 vs. 2009: 13) which currently have a 25-35% ticket mark-up. Covert price increases via differential pricing schemes should in our view support future revenue growth.
• Advertising opportunity: We currently estimate an 8% increase in Cineworld’s FY11 advertising revenues, given the low base and stabilisation in advertising markets. DCM, the Cineworld-Odeon Cinema advertising JV, started advertising for Vue in Jan 2011 and it now claims 79.9% of the UK cinema advertising market. We see upside in DCM’s ability to improve advertising volumes and also believe there is scope for cinema operators to renegotiate the 15% commission paid to DCM. Advertising revenues are high margin (100%) and although they provide only 4% of Cineworld’s FY11E revenues, they account for 24% of EBITDA.
• Digital efficiencies yet untapped: We expect Cineworld to have digitised c.60% of its estate by July 2011 and 100% by June 2013. Operational savings on personnel and distribution via digital are likely to come in the last leg of estate conversion. Considering 2010 personnel costs were £52m, a conservative 2% saving here would increase FY13E EBITDA by 1.5%.
• Expansion through acquisition: We have assumed that the acquisition of Cinesur, an 11 site Spanish cinema chain adds c.1% to FY12E EBITDA.
• Favourable debt renegotiation: Management has renegotiated the debt facility and costs are likely to remain unchanged at LIBOR+0.7%. As a result we have raised our FY12E EPS by 4.7%.

[ImperatorAtticus]

“We expect Cineworld to have digitised c.60% of its estate by July 2011 and 100% by June 2013.”

[OPR]

Staff cuts, 3D mark-ups… the business world depresses me

[Speed]

“We expect Cineworld to have digitised c.60% of its estate by July 2011 and 100% by June 2013.”

They are falling behind - they wanted to be 100% digital by the end of 2012!