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The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
Once again, Regal’s (NYSE:RGC) profitability exceeded our expectations primarily due to effective cost control. Revenue was $723 million, compared with our estimate of $729 million, and the consensus estimate of $732 million. EPS was $0.24, compared with our estimate of $0.20, and the consensus estimate of $0.19. The company does not provide forward guidance.
Mixed results in Q2. Admissions revenue per average screen was 70 basis points below the industry, and while concessions were down y-o-y on a dollar basis, concessions per cap were the highest in Regal’s (NYSE:RGC) history. Average ticket prices were well above our estimate due to growth in the premium format. The $0.04 beat relative to our above-consensus estimate was primarily due to cost control, despite some cost pressures present in Q2, such as lower film rental margins and a higher mix of premium tickets sold in Q2 resulting in a higher payout to IMAX (NASDAQ:IMAX) and RealD (NYSE:RLD). Lower rent expense and other operating expenses, while partially due to a lower screen count, also contributed to the beat. Regal completed its net theater closures in Q2, and thus, we expect cost control opportunities to be limited going forward.
We maintain our FY:12 estimates for revenue of $2.8 billion, while increasing our estimate for EPS to $0.95 from $0.91 to reflect Q2 upside and higher average ticket, offsetting fewer theater openings for the full year. We are decreasing our FY:13 estimates slightly for revenue of $2.91 billion from $2.93 billion and decreasing our EPS estimate to $1.02 from $1.06 to reflect more modest attendance levels, relatively flat ticket prices, and slightly less operating margin expansion given net theater openings and more difficult comparisons.
Management is committed to returning capital to shareholders. The company is committed to its annual dividend of $0.84 for the foreseeable future. While this signals that the business is sufficiently predictable and controllable to cover debt service and dividends, the company’s high degree of leverage could trigger a sharp downturn in earnings should revenues decline only slightly.
Maintaining our NEUTRAL rating, but lowering our price target to $15 from $16 as we do not see any significant catalysts to boost Regal back to its historical multiple. After accounting for Regal’s ownership stake in National CineMedia, we arrive at a $15 price target. This reflects a 6.0x EV/Adjusted EBITDA multiple on our 2013 estimates, below its historical multiple of 6.3x and in line with its peers. In our view, this multiple reflects a stable business with low growth, while also reflecting debt levels and limited catalysts over the near-term.
Michael Pachter is an analyst at Wedbush Securities.
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