Showtime in 3D for Galaxy

04/07/2010 11:04 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Canada’s top cinema chain is cashing in on the growing popularity of 3D movies, write Roger Conrad and David Dittman in Canadian Edge.

Here’s the thing about Cineplex Galaxy Income Fund (Toronto: CGX-U, OTC: CPXGF): Canada’s dominant movie-theater operator has never cut its distribution. And it’s set to maintain its perfect record through its conversion into a corporation later this year.

Cineplex runs 129 theaters with a total of 1,329 screens. It’s the fifth largest exhibitor in North America.

Revenue increased 13.5% to a company record $964.3 million in 2009. Strong movies led to all-time high box office totals—box office revenue was up 16.7% to $581.1 million as Cineplex welcomed a record 70 million moviegoers in 2009, up 10.2% from 2008. Concession revenue grew 14.5% on rising attendance and a 3.9% increase in revenue per customer. Distributable cash of $2.14 per unit was up 15.4% over 2008.

In the wake of North America’s March 2009 bottom, Cineplex has underperformed, by 8% against the broad S&P/Toronto Stock Exchange Index, more than 25% versus the S&P/TSX Income Trust Index. But Cineplex has generated a return of nearly 300% in US dollar terms for those who were fortunate enough to pick up units around the time of its November 2003 initial public offering.

And since mid-December 2007, the starting point for the recession in the United States, it’s up nearly 20% in price terms and sports a total return of more than 44%, beating the S&P/TSX and the income trust index by 50% and 20%, respectively, in US dollar terms, and spanking the Standard & Poor’s 500 by 60%.

Management has boosted the monthly distribution twice since the IPO, most recently in early 2008, from ten Canadian cents to the current 10.5 cents per unit. The first increase occurred in mid-2007. The timing of these increases is further indication that going to the movies—still a relatively cheap way to entertain the whole family—is a recession-resistant activity.

The major variable isn’t economic in nature; it’s the quality of the films coming out of Hollywood, and the creatives seem to have figured out a way to keep the pipeline full with engaging as well as innovative entertainment. The way business is now strongly suggests management will sustain the current payout rate through 2011, and well beyond.

Cineplex Galaxy is the essence of a strong income-generator: It occupies a dominant position in a business with reasonably predictable cash flows. At these levels, around US $20 a unit, even with a management team more focused on preserving long-term sustainability, Cineplex Galaxy still yields more than 6%.

Hollywood has a formula that seems to be working: sequels, sorcery, superheroes, and a James Cameron blockbuster every decade or so. Cineplex Galaxy has a formula, too—for slow, steady, recession-resistant income and growth. [The ADRs closed at $20.58 in over-the-counter trading Tuesday—Editor.]

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