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The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
Regal Entertainment (NYSE:RGC) will report its Q2:12 results after the market close on Thursday, July 26, and host a conference call at 1:30pm PT (dial-in: 877-407-0778, webcast: http://www.REGmovies.com).
We expect results in line with our recently revised estimates. We expect revenue of $729 million compared to consensus of $732 million, and EPS of $0.20 compared to consensus of $0.19. Regal did not provide guidance.
Based on a June 28 quarter end, Q2 box office decreased 2.7% y-o-y for Regal, according to boxofficemojo.com. April domestic box office ended down 9.0%, despite a strong showing by The Hunger Games (NYSE:LGF) in the month after its release. May domestic box office ended down 1.3% despite The Avengers breaking opening weekend records and surpassing expectations, with $532 million domestically during May. June box office ended up 4.7% with Madagascar 3 ($176 million in June) in the lead, and four movies generated over $100 million in June.
We expect film rental costs to be up, pressuring margins due to a higher concentration of total box office within the top ten movies. We expect film rental margin to be 46.2%, 120bps below last year.
We expect income from National CineMedia to contribute $0.01 to EPS in Q2. This compares to contributions of $0.09 in Q1 and $0.03 in Q2 last year.
As of July 20, year-to-date box office is up 6.8% compared to 2011, which should make Regal’s cash position sufficient to pay its dividend. Based on our calculations, a decline in 2012 box office over 2011 could impair Regal’s ability to continue meeting its total cash outlays. We believe the decent start to 2012provides an additional buffer against potential weakness during the balance of the year, beyond curbing capex. Additionally, we expect a solid summer box office.
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, we question whether it is appropriate to pay out significantly more than the company earns, while maintaining a high degree of leverage.
Maintain our NEUTRAL rating and $16 price target for Regal. After accounting for Regal’s ownership stake in National CineMedia, we arrive at a $16 price target. This reflects a 6.1x 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.
Michael Pachter is an analyst at Wedbush Securities.
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