Description

Recommendation: Long Cinemark (CNK) at current prices.

Thesis: The US box office is recovering to ~80% of pre-COVID levels now while consensus holds onto the stale belief that movie theaters are dead. As the box recovers CNK will see both positive estimate revisions and multiple expansion (fueled by some covering of the existing 24% short interest). I see 50% upside to the stock in the next 6 months.

Price Target: I see 10% upside on ’23 EBITDA vs street at $470m, such that on estimate revisions alone is worth 20% upside to the stock. Furthermore, I believe CNK can re-rate closer to its historical pre-COVID multiple of 8x. CNK trades at 7x street ’23 street EBITDA and each 1x turn on CNK is worth 30% to CNK’s stock. At 8x my 2023 EBITDA estimate of $515 mm (which implies 11-12x FCF on a 3x levered balance sheet) there is 50% upside from the current price.

Situation Overview: CNK is a movie theater operator with a footprint across the US and LATAM, with the US accounting for 80% of the business. CNK, along with the rest of the movie exhibition industry, saw significant disruptions through COVID and went through a series of temporary closures before reopening all theaters by year end ’21. Business performance correlates closely with box office performance, which in ’20 fell to 20% of ’19 levels, and most recently recovered to 65% in ’22.

Why the opportunity exists:

• The supply of wide releases (WR) is a key driver for the domestic box office (DBO) and has tracked well as a proxy for ’22 and pre-COVID. Movie supply was interrupted over COVID and created a production gap as there is a meaningful lag between the time a movie is greenlit to when it premieres (generally two years). However, the market is underestimating the recovery in wide release supply volume, from both a production disruption standpoint as well as assuming movies in theaters are going away meaningfully.
  • In ’22, the volume of WR recovered to 60% of ’19 levels, yet DBO in ’22 recovered to 65% of ’19 levels. Industry consensus expects ’23 WR to be 80% of pre-COVID levels, and I think of this data point as a reasonable starting point and proxy for ’23 DBO recovery.
    • A caveat to this analysis is that DBO performance is also a function of film “quality” in terms of ability to generate box office revenue, especially for the tentpole films. For instance, Top Gun: Maverick (#1 grossing in ’22) accounted for nearly 10% of ’22 DBO, and if it did only what the #2 film did, DBO recovery would have been impacted by 2.5% (i.e. ’22 DBO would have been 62.5% of ’19 levels instead of 65%).
    • However, the studios are seeing / have scheduled WR product flow to return fully to pre-COVID levels this coming April to May, such that there could be upside to the 80% WR recovery industry consensus expects for ’23. I assume that the upside risk of ‘23 WR supply recovering to 85% of ’19 balances out the downside risk of tentpoles underperforming on film “quality” and think a high 70% DBO recovery for ’23 is reasonable.
• CNK had been trading in the 7-9x range (average ~8x) historically pre-COVID (see Exhibit 1). However, multiples came under pressure towards the tail end of that period on heightened disintermediation risk as theatrical windows were cannibalized in favor of driving streaming initiatives, and leakage of smaller films to streaming platforms occurred.
  • Coming out of COVID, experimentation with theatrical windows has moderated and we are now seeing studios moving towards a more balanced distribution model and pivoting back to theatrical.
  • We are also seeing larger theatrical commitments from streamers such as AMZN who is reportedly investing $1bn annually to release 12-15 movies, with AAPL following behind. With more streamers embracing the theatrical window and legacy studios pivoting back to theatrical, I believe dispelling the disintermediation risk along with a more rapid DBO recovery could lead to CNK re-rating to pre-COVID levels.

Risks:

• Attendance significantly disappoints once a full slate of films in theaters returns this year, causing studios to pull back on supply and streamers to reconsider their new commitments to a theatrical window.
• Decrease / reversion in per caps normalizing back to pre-COVID levels.
  • However, per caps have held consistently well over the last 8 quarters vs ’19 levels (up 30%) and there hasn’t been evidence of a slowdown in consumer demand. CNK thinks they can still grow per caps from here in ’23.
• High financial leverage (5.5x LTM albeit on a depressed EBITDA) creates a wider range of outcomes. Note – on consensus estimates CNK will end 2023 at a more modest 3.6x, and at 3.2x our higher ’23 estimate

Catalysts:

• Positive estimate revisions.
• Outperformance in tentpoles in the near-term, of which a couple upcoming ones include John Wick: Chapter 4 (late March), and Guardians of the Galaxy Vol. 3 (early May).
• Positive headlines around streamers (next most likely is Apple, with NFLX still TBD) embracing the theatrical window like in the case of AMZN.
• Positive headlines around movie supply.
• Regal / Cineworld bankruptcy & resolution
  • Regal locations in CNK footprint that are about to be closed will benefit CNK market share.
  • There could be accretive asset acquisitions arising from the bankruptcy.
  • Ultimately a resolution of the Regal uncertainty is helpful for industry sentiment.

Apologies in advance: I am not able to respond to questions in the Q&A thread.

Exhibit 1: Historical EV / EBITDA

Period from Feb 2020 (onset of COVID) to Nov 2021 (all theaters reopened) not meaningful given COVID impact obfuscated valuation multiples.

Exhibit 2: Summary Financials and Multiples

Catalyst

• Positive estimate revisions.
• Outperformance in tentpoles in the near-term, of which a couple upcoming ones include John Wick: Chapter 4 (late March), and Guardians of the Galaxy Vol. 3 (early May).
• Positive headlines around streamers (next most likely is Apple, with NFLX still TBD) embracing the theatrical window like in the case of AMZN.
• Positive headlines around movie supply.
• Regal / Cineworld bankruptcy & resolution
  • Regal locations in CNK footprint that are about to be closed will benefit CNK market share.
  • There could be accretive asset acquisitions arising from the bankruptcy.
  • Ultimately a resolution of the Regal uncertainty is helpful for industry sentiment.