|Shares Out. (in M):||131||P/E||0||0|
|Market Cap (in $M):||3,075||P/FCF||0||6.8|
|Net Debt (in $M):||4,664||EBIT||0||0|
This is a write-up for long AMC Entertainment (AMC), and it’s also for long National Cinemedia (NCMI), of which AMC is a 25% owner. I know another member recently wrote up AMC, but I had this in process and think the story deserves a little more meat on the bones..
I was short NCMI for most of the past 18 months, recently covered, and now I’m long. What has changed?: (i) a guidance miss at 4Q earnings, (ii) a guide-down at 1Q earnings, and (iii) the stock is down ~50% YTD. However, I’ve come to view the dividend as less at-risk than I had previously thought, due primarily a lower cash tax rate. While the overhang of AMC’s share sale remains, at a 12% dividend yield, I believe this overhang is over-discounted; and I believe the stock will trade back to a SD% divi yield after the overhang is (at least temporarily) alleviated, whether through a secondary or M&A involving AMC’s stake or the entire NCMI enterprise. Lastly, the stock is just much cheaper now - it has never traded wide of a 7% divi yield, and now it trades at ~12%. This only makes sense in the context of a divi cut, which I see as unlikely.
The upside in NCMI offers upside optionality to AMC, given its 25% ownership of NCMI and the need to monetize that stake near-term. But even ignoring the opportunity in NCMI, I believe AMC’s -25% YTD performance reflects a technical dislocation in the market, and presents a compelling buying opportunity. YTD box office is +MSD% and QTD is +LSD%, and AMC beat Street in 1Q. However, by looking at the stock chart, you would think fundamentals are falling off a cliff. They’re not, and I believe the May selloff in AMC to be primarily technical in nature. First, there's a bit of sell-the-news dynamic after a string of deals that had the stock strong bid all of last year. Second, there was over-blown concerns around 1/2 of Terra Firma's shares coming off lock-up on May 31. Third, AMC recently sold stock in a secondary, likely leaving some uncommitted holders with shares to sell. Fourth, a number of PVOD headlines have hit, and whether suggesting yes-PVOD or no-PVOD, the stock always reacts negatively to these headlines (the mere subject is toxic for stock performance). Fifth, see AMC's YTD stock performance (-30%) versus peers CNK/RGC (flat) below. Lastly, all of this, in a levered stock, with a heavy HF/platform holder base = messy trading.
Ultimately, I believe exhibitor stocks have emerged as a rare pocket of value in the current market, and I see 50-60% upside for NCMI (from its 12% yield and multiple expansion back to a SD% divi yield) and >70% upside in AMC (from EBITDA growth and multiple expansion) over the next 6-12 months. AMC mgmt sees upside too and has bought ~$350k worth of stock in the past week. RGC (short) offers itself as a decent box office hedge, given its relative outperformance and the Anschutz overhang.
I’ll start with NCMI, which I believe is attractive on a standalone basis, and also offers added upside optionality to AMC. I have formerly written up NCMI in two prior postings (one long and one short), and both had active message boards. So, I will just provide a quick update here, and explain why I am now long.
NCMI guided below Street for FY’17 on its 4Q’16 call, and then had to take down that guide on the 1Q call, due to a soft scatter market. I believe the bar has been sufficiently lowered, and NCMI’s guidance for the year is now attainable. At the mid-point of guidance, mgmt has indicated it is covering its dividend. I was at-first skeptical of this, but have come to understand that the prior mgmt teams 35% cash tax rate guidance has been proving conservative, and the current mgmt team sees a mid-20s% tax rate for the foreseeable future (note: because of a tax-sharing arrangement with the founding members, it is difficult to discern the actual cash taxes paid by NCMI, the Holdco). Per the below, reflecting this cash tax rate, NCMI is covering its ~12% dividend. In addition, NCMI has $75mm of cash sitting at the holdco, with a sole purpose of providing a cushion for the dividend. Even if the operating company generated no cash flow (a very unrealistic assumption), cash at holdco is sufficient to cover more than one year of dividend payments. Bottom line: even if the dividend coverage fell below 100%, the board is NOT likely to cut the dividend.
Lastly, I would note that at this stock price, NCMI trades at <9x EBITDA, and a ~12% FCF and dividend yield. It is a stable business with ~50% EBITDA margins and essentially no capex needs. The fixed cost of the Theater Access Fee stepped up in 2017, impacting margins, but doesn’t step up again for five years. There is a realistic chance that NCMI could be purchased by private equity, especially given press reports that PE is kicking the tires on NCMI’s smaller competitor, Screenvision.
AMC: BUSINESS OVERVIEW
AMC is one of the ‘Big 3’ US exhibitors that dominate ~2/3 of the US box office. Of the three, AMC has the best quality assets and has been a first-mover in successful growth initiatives such as theater “reseats” it embarked upon in 2013 – RGC/CNK are now playing catch-up as copy-cats. In Jan 2016, Adam Aron took over as CEO and has demonstrated a large appetite for M&A. He immediately pursued a deal to acquire Carmike (CKEC), the fourth largest US exhibitor, and then branched out into European markets. Recent deals are as follows:
Now, AMC is the largest exhibitor in the world with over 1k theaters and 11k screens. Its legacy theaters skew toward larger markets, while the CKEC network (10-15% of revenue) is in smaller and rural markets.