Good Cash Flow but Limited Growth for this Media Company

CGX - Cineplex

Cineplex is a leading Canadian entertainment and media company. It is one of the largest and most innovative film entertainment company in Canada.

Cineplex’s operations are primarily conducted through three reportable segments: film entertainment and content (76% of revenues), media (11%), and amusement and leisure (13%). Theatre exhibition is the core business of Cineplex.

As the largest movie theatre chain in Canada, Cineplex receives 70 million guests annually through its network of 165 theatres across the country. The company also operates businesses in digital commerce, food service, alternative programming, cinema media, amusement solutions and online esports platform.

As a leading top tier entertainment brand in Canada, Cineplex continues to introduce tailored entertainment experiences in communities across the country.

CGX - Business Segments
Source: Cineplex Quarterly Presentation
Investment Data

Revenue Growth & Market Exposure

Box office revenues continue to account for the largest portion of Cineplex’s revenues. Expanded theatre food service offerings, cinema media, digital place-based media, amusement and leisure, constitutes the remaining. The company has been successful in growing its revenues in the last decade.

CGX - Total Revenue
Source: Cineplex Quarterly Presentation

Cineplex continues to expand its existing infrastructure and service offerings to attract new customers and increase revenue per guest. These initiatives include increased premium offerings, enhanced in-theatre services, alternative pricing strategies, and initiatives in theatre food service.

Cineplex is a joint venture partner in SCENE (Canada’s top entertainment loyalty program), Canada’s largest entertainment loyalty program. The company uses the SCENE loyalty program to drive customer acquisition and ancillary businesses.

Cineplex is executing a diversification plan to enter into other businesses through its media, and amusement and leisure businesses to reduce fluctuations at the box office and improve bottom line growth. As a result, its revenue mix has been shifting from box office revenue to other revenue sources.

CGX - Box Office Per Patron
Source: Cineplex Quarterly Presentation – Box Office Per Patron

The company enters into strategic acquisition agreements from time to time that helps capitalize on its core strengths. Cineplex has good relations with major film distributors, which has helped the company to negotiate commercially favourable licensing terms for films and licenses.

In order to attract new customers and enhance customer experience, Cineplex continues to invest in its theatres, for example adding recliner seating, installing VR systems in theatres etc. The company is also expanding its digital outreach through mobile applications, digital devices and kiosks for ticket purchases. It is also looking at opening new complexes targeting teens and families, and sports and entertainment venues across Canada.

Dividends

Cineplex is a Canadian Dividend Aristocrat and has announced a dividend increase each year since its status as a corporation. The company currently sports a high dividend yield of 6%. It last raised its dividend by 3.5% and has maintained a 10-year dividend CAGR of over 3%.

Cineplex’s box office market share was approximately 76% based on Canadian industry box office revenues as of September 2018. The company has registered a 5.6% CAGR in earnings over the last decade. Its dividends are supported by strong cash flow.

Cineplex is in a good position to capitalize on its core media strengths for continued growth. The company plans to open and renovate an average of one to two theatres annually. The company is well-positioned to emerge as an entertainment destination for Canadians, and expand its presence in-theatre, at-home and on-the-go. Opportunities in entertainment and media industry act as tailwinds for the company.

The company’s diversification efforts are bearing fruit and slowly increasing the long-term growth trajectory of the company making a solid impact on earnings. The “other revenue” segment now accounts for 25% of total revenue.

Cineplex is favorably positioned to benefit from increasing diversification, strong cash flows, growing presence in the lucrative e-gaming world. Growing entertainment needs of the millennials and baby boomers should support future growth.

Competition

Cineplex competes with other consumption platforms, including cable, satellite television, DVDs and Blurays, as well as DTO, VoD, subscription video on demand and other operators like Netflix, Amazon Prime via the Internet.

Apple and Disney are also ready to hit the video-streaming market this year which could pose a strong threat for Cineplex. However, Cineplex’s increased efforts towards diversification from its core conventional business should help the company ward off some competition. The SCENE loyalty program also has been a key differentiator for Cineplex stores versus competitors for the in-home and on-the-go movie market.

Cineplex owns the Canadian market with a near monopoly in each provinces. Growth comes from attracting more customers or increasing the spend by customers. Growth, unfortunately will slow down in Canada and will need to come from the US.

CGX - Canadian Market Share
Source: Cineplex Quarterly Presentation
CGX - US Coverage
Source: Cineplex Quarterly Presentation

Bottom Line

As the largest and most successful motion picture exhibition company in Canada, Cineplex is well positioned to meet the growing demand for entertainment, amusement and leisure, and expanded premium offering. Its long-term diversification strategy should guard it from box-office fluctuations.

Visibility should improve as Cineplex’s diversification efforts starts showing results. The company might not be able to sustain aggressive dividend increases, given its advancing diversification efforts. However, investors should look forward to the company’s transformation into a diversified entertainment company and modest dividend growth in future.

CGX used to operate as an income trust company and paid a high yield as expected per the income trust regulations. After the conversion to a corporation in 2011, Cineplex managed to retain the higher yield and its payout ratio should be evaluated against its funds from operations or free cash flow (used by Cineplex). Dividend growth is in the low to mid single digit and there are no sign to go higher. If Cineplex were to need funds to accelerate their investments, the dividend could be at risk unless it decides to increase its debt. Investors in CGX should be cautious.

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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