Cineplex Inc. - Diversification Paying Dividends

Cineplex is the largest film exhibition company in Canada with approximately 67% of the market share of Canadian box office revenues. The company owns, operates or has an interest in approximately 130 theaters with 1,350 screens. The company operates the following brands: Cineplex Odeon, Galaxy, Famous Players, Colossus, Coliseum, SilverCity, Cinema City and Scotiabank Theatres.

Last week Cineplex reported Q1/11 results that were largely in line with expectations. Investors widely expected Q1/11 box office results to be weak on the back of tough YoY comps versus Avatar. Looking forward, we see the following diversification benefits: (i) the continued build out of higher-priced 3D, UltraAVX and D-BOX; (ii) a ramp-up in 3D sports alternative programming; (iii) continued growth in high-margin media revenues given a still strong national advertising market; (iv) growth in interactive media, particularly from the new DTO and VOD services once Ultraviolet becomes available in 6-8 months; and (v) continued increases in SCENE membership with positive implications for box office attendance, concession revenue and advertising rates.

The company increased the dividend +2.4% from $1.26 to 1.29 representing a dividend yield of 5.1% and a payout ratio (% of FCF) of 73% in 2011E and 64% in 2012E versus a target payout ratio of 65%-80%. Management indicated that the size of the dividend increase reflects a degree of conservatism as well as the desire to finalize the CDCP agreement,
which is expected by the end of Q2/11. I suspect the company also wants to maintain a certain degree of financial flexibility in the event acquisition
opportunities arise.