March Q1 2012 results of movie theater operator/owner and real estate developer, Reading International, Inc. (NASDAQ:RDI) (NASDAQ:RDIB) were impressive, illustrating another quarter of growth in revenues, operating income and operating margin vs. prior year. A very strong series of films during the quarter not only heated up the screens and filled seats at Reading’s many cinema chains but also helped sell a lot of high-margin popcorn and soda.
Historical background on Reading, now a $254MM LTM revenue, but only a $124MM market cap company, is available in this past Just One Stock interview and periodic progress of Reading’s many cinema and real estate activities can be tracked in these other Seeking Alpha articles on Reading. Despite the company’s consistent delivery of operating performance and its large cinema market shares in Australia (#4), New Zealand (#3) and the United States (#11), Reading still lacks coverage by even a single sell-side entertainment, consumer non-durable, or real estate industry analyst.
Notwithstanding some recent appreciation in the Reading International, Inc. (NASDAQ:RDI) stock price, the lack of other secondary analysis of this relatively undiscovered company contributes to RDI still trading at a bigger discount to book value/share than any of the three larger US publicly-traded theater exhibitors, Regal Entertainment Group (NYSE:RGC), Cinemark Holdings, Inc. (NYSE:CNK) and Carmike Cinemas, Inc. (NASDAQ:CKEC).
As Reading’s strong growth in sustainable cash flows and its superior holdings of geographically diversified real estate with sizable unrealized appreciation become discovered, the “value gap” that exists in RDI shares should narrow. Reading’s detailed March Q1 2012 10-Q can be found here and certain salient findings of this filing are discussed, below.
Box Office Has Started Strong in Q1 With Great Prospects For Rest of 2012
According to Box Office Mojo, Domestic Q1 2012 total movie grosses were up over 23% from the prior year with Lions Gate Entertainment Corp. (NYSE:LGF)’s blockbuster, “The Hunger Games” leading the charge. The top three grossing films for Q1 in Reading’s worldwide cinema circuit were Weinstein Company’s “The Artist,” “The Hunger Games,” and Warner Bros.’ (TWX) “Sherlock Holmes: Game of Shadows.” Note that another hit film in Q1, Comcast Corporation (NASDAQ:CMCSA)’s “Dr. Seuss’ The Lorax” did not open in Reading’s Australia and New Zealand markets until March 29.
Q2 Box office has already started off strong, not only with “Dr. Seuss’ The Lorax” in Australia and New Zealand for Reading, but also The Walt Disney Company (NYSE:DIS) Marvel’s “The Avengers,” which is breaking several summer and opening box office records here and abroad. The movie release schedule for the remainder of 2012 contains a greater number of 3D movies than 2011 and several well-known ‘franchise’ blockbusters, including the next installment in Warner Bros’ Batman series, “The Dark Knight Rises,” scheduled for release in early Q3.
Reading’s overall Q1 2012 revenues grew +15.5% from prior year, primarily driven by its cinema segment performance in the US.Revenues of the company’s large Cinema segment, which produces the bulk of Reading’s cash flows, grew by $7.9MM or 16% y/y, while its smaller Real Estate segment revenues grew $0.4MM y/y or 10.1%.
Last year, Reading’s strong international box office growth fueled performance. In addition, Reading’s relatively higher mix of international screens has contributed to Reading’s cinema revenue growth often exceeding all three of the larger US publicly-traded theater exhibitors – Regal Cinemas, Cinemark Holdings and Carmike Cinemas.
However, this quarter, Reading’s cinema segment revenue growth was primarily the result of double-digit increases in US attendance (from a strong film slate and a few additional screens) plus modest Aussie and New Zealand currency moves. Attendance in Australia was relatively flat with a later opening of “Dr. Seuss’ The Lorax,” a strong 2011 to comp against, and a few low-profit screens closed. Real Estate segment revenue growth was the result of higher rents in Australia and New Zealand and modest currency improvement.
As illustrated in the table, below, Reading’s Global Cinema Revenue growth was “held back” to 16% by its substantial mix of international cinema revenue that only grew 6.4%. Fellow international exhibitor, Cinemark Holdings also had its Global Cinema Revenue growth muted by lower international revenue growth as well. Noteworthy is the fact that Reading’s Domestic Cinema Revenue growth exceeded the #1 US exhibitor, Regal Cinemas and #3 Cinemark Holdings (Carmike is #4 and private AMC Entertainment is #2.)
|Q1- March 2012||RDI||CNK||RGC||CKEC|
|Y/Y Rev. Growth|
|Domestic Cinema Revenue||27.8%||24.3%||20.0%||36.6%|
|Global Cinema Revenue (including US)||16.0%||19.8%||20.0%||36.6%|
|Cinema Revenue Mix|
Q1’s Operating Income (EBIT) jumped 149% from prior year to $4.9MM. Adjusted Operating EBITDA (Operating Income + Dptn/Amort) of $9.1MM was 49% higher than prior year’s Operating EBITDA. Reading’s cash flow growth vs. prior year came from both its Cinema and Real estate segments. Cinema Segment margins jumped from the prior year, benefiting from operating leverage on fuller theaters, improved film rental margins from extended runs of some popular films and increased revenue mix from concessions, which carry much higher margin than admissions. Real estate margins slightly narrowed on higher operating expenses, primarily in the US, related to increased maintenance, repairs and legal costs.
Q1’s net loss of $0.2MM was a $2.2 improvement over prior year. While Q1’s pre-tax income was positive, a much higher Australian tax provision of $1.0MM created the quarter’s loss.
Reading’s Hard Asset Balance Sheet More Compelling Than Peers
Reading’s increased book value of $5.55/share is up 13.6% from prior year, with Australian and New Zealand 3/31/12 currency exchange rates up y/y only 0.1% and 7.3%, respectively. As explained in the Just One Stock interview, I believe Reading’s book value greatly understates the current fair market value of Reading’s Australian, New Zealand, New York and Chicago real estate, much of which has appreciated in value over more than a decade of ownership, from population growth, up-zoning, and in some instances, development into rent-generating parcels.
In addition to stated book value and some substantial amount of unrealized gain embedded in Reading’s long-held real estate, as disclosed in the footnotes of Reading’s 2011 10-K, at December 31, 2011, Reading had $95.1MM in tax NOLs ($45.9MM and $15.8 MM of Australian and New Zealand tax NOLs, without any expiration date, respectively, and $33.4MM of US NOL’s not expiring until at least 2025.) that should shield future real estate sales gains and pre-tax income growth from taxation for several years.
The table, updated below for Q1 results, illustrates that Reading’s net debt to total assets % is amongst the industry’s most conservative, and much safer than Regal Cinemas’ and Carmike Cinemas’ high leverage ratios. In fact, as of March 31, 2012, Regal and Carmike both have negative book value from sizable past losses, restructurings and distributions in excess of income. However, what makes the table below so compelling is that Reading’s true asset and book value is likely even higher because of sizable unrealized appreciation in the Company’s real estate.
|Q1- March 31, 2012||RDI||CNK||RGC||CKEC|
|Balance Sheet Comparison|
|Net Debt ($mm)||$176.0||$1,183.5||$1,693.9||$298.4|
|Total Assets ($mm)||$431.5||$3,574.7||$2,307.0||$420.8|
|Net Debt/Total Assets %||41%||33%||73%||71%|
|* Closing prices as of 04/10/12, all balance sheet items from 3/31/12 10-Q.|
Reading finished the March quarter with substantial liquidity. On March 31, 2012, Reading had cash and marketable securities of $31.5MM plus a combined $25.7MM of undrawn availability on its several lines of credit. Reading’s 3/31/12 debt, net of the above-mentioned cash is $175.9MM, $18.3MM lower than prior year, as a result of continued strong cash flow generation