IMAX Corporation Seeing The Big Picture

MAX : NYSE : US$27.00
Target: US$32.00

IMAX Corporation is one of the world’s leading entertainment technology companies, specializing in  motion picture technologies and large-format motion picture presentations. The company’s principal business is the design and manufacture of large-format digital and film-based theater systems and the sale or lease of IMAX theater systems or the contribution of IMAX theater systems under revenue-sharing arrangements to its customers.

All amounts in US$ unless otherwise noted

Media — Film and Entertainment
Investment recommendation
In light of the volatility in the stock last week, we wanted to provide a clearer view as to how we think IMAX is being valued in the market, in addition to our own fundamental valuations. The objective is to identify reasonable entry and exit points, and thereby perhaps take advantage of such periods of volatility. One of the challenges we have experienced is that IMAX does not have reliable comps. Albeit from a different sector, we think using names such as Starbucks, Michael Kors, and Nike as
valuation comps shed light on pricing. We believe they share the broad investment profile of IMAX in that they represent premium brands (affordable luxuries) with EBITDA projected to swing up sharply over the next four years (on average, doubling from 2012-2016E), and are primarily international expansion stories.

As we have shown in this note, there are some interesting valuation comparisons, particularly as we extend to the outer years (2015E, 2016E). On this basis, we consider 11-12x 2014E EV/EBITDA to be very compelling entry points for IMAX;
this represents a range of $23.80 to $25.75. It is well below IMAX’s longer term forward year average of 15x and at the low end of the above listed comps.

Whenever IMAX’s share price hits these levels, we advise aggressive overweighting of the stock. On the other hand, if the trading multiples rise to Starbucks’ levels, which reside in the high end of the range, we would see the stock as being fully valued. At SBUX’s 14.9x EV/EBITDA 2014E, IMAX would be trading at $31.25, and at its 12.5x 2015E, IMAX would be trading at $34.70 per share. We value IMAX by using a DCF analysis, to arrive at our 12-month target of US$32.00 per share. We use a discount factor of 8.5%.

Q3/13 preview: We have been warning of an anticipated light film slate in Q3/13 as far back as September of last year, and we have not been disappointed; it likely ended even weaker than expected. We are looking for $12.8 million in adjusted EBITDA in Q3/13E, down 62% y/y, with revenue of $51.2 million, down 37% y/y. EPS (ops) is forecast to swing to negative territory at -$0.003, down from $0.22 in the prior year.


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