Stifel Downgrades Canadian Cineplex On Falling Advertising Revenue, Fair Valuation

In a report published Thursday, Stifel analysts Benjamin Mogil and Kevin Lee Hon Siong downgraded the stock of Canadian CINEPLEX INC CPXGF from Buy to Hold, as high margin advertising revenue slows down in 2015 and shares trade at their fair value of C$44 (which had been their previous target price).

The stock recently traded at C$44.89.

Related Link: Shares Of Cinemark Could Benefit From Record 2015 Box Office

Why The Downgrade?

According to the report, two major items drove the stock’s demotion:

1) Media Driven Growth

“While the 2015 box office is slated to be a record one, Cineplex' growth over the last few years, particularly at the operating line, has been more Media driven. Also, we [Stifel’s analysts] anticipate that 2015 will see a much slower (and possibly flat/negative) growth rate in this category as the Canadian economy continues to slow, particularly in Western Canada (25 percent of screens).”

On the flip side, analysts do not expect the slowdown in Canadian economy to have a meaningful effect the box office or concession sales. However, since media accounts for 30 percent of theater-level (i.e. pre-G&A) cash flow and likely around 25 percent of EBITDA (according to Stifel estimates), the impact on cash flow should be significant.

2) Cineplex Is More Costly Than Peers

“Cineplex has always been an expensive stock relative to the U.S. exhibitors since the income trust days. That by itself, even with the name trading 6.4x higher (2015E EV/EBITDA) than the peer group, is not sufficient for the downgrade, as the premium has been this high in the past. That said, we believe the stock's performance/valuation in the past has been largely tied to its safety/haven status (non-resource yield) in a commodity heavy TSX index.”

“However, this sheen appears to be somewhat dulling as last year the name underperformed both the U.S. exhibition peers (negating the weak box office as a rationale for the underperformance) and other TSX-listed consumer discretionary names.”

Finally, the analysts pointed out one more negative issue: the company’s usual May dividend increase (which is still likely) could be more muted/limited.