Andre Kostolany April 5, 2018

National Cinemedia (NCMI)

Would very much appreciate everyone’s thoughts / comments / feedback / criticism. If there’s interest, I might follow-up with a full writeup.

Notes

  • NCMI has the #1 market share for on-screen advertising (about 50%)
  • The industry is an oligopoly with NCMI and Screenvision having about 85% market share
  • Basically NCMI owns the right to run a 30-minute pre-movie show in its founding members US theaters, which includes advertising. This right is backed by long-term exhibitor agreements with the founding members which, to the best of my understanding cannot be revoked
  • Let me repeat, 90% of the opportunity around NCMI revolves around their ability to monetize the 30-minutes BEFORE the movie trailers start
  • Founding members (and co-owners of NCMI) are AMC, Cinemark, Regal
  • NCMI derives revenue principally from selling advertising during these 30 minutes
  • NCMI has produced stable OIBDA margins since its IPO as well as relatively stable revenues
  • NCMI, Inc., the publicly listed entity owns a 49.5% stake in NCMI, LLC. The rest of LLC is owned by the founding members
  • AMC, the largest owner of NCMI, LLC is being required to divest the majority of its equity interests after an anti-competitive DOJ ruling (this was a condition for its takeover of Cinemark)
  • AMC has until June 2019 to dispose of 9.5% of its stake (to reduce its stake below 5%)
  • At the same time, 2017 had a relatively mediocre movie slate and attendance was down. Somehow this led to the stock falling from $16 to $5
  • At its current price of $5.24 NCMI trades at a 13% dividend yield
  • The company pays out almost the entirety of its free cash flow via dividend to shareholders and founding members
  • 2018, so far, has been a better year in terms of theater attendance led by Black Panther
  • Optimism and pessimism about the slate come and go, offset by probably 6 to 12 months
  • MoviePass could help increase theater attendance as well

Further Comments

  • I find this situation highly interesting and am looking for reasons why this traded at a 5-6% dividend yield forever and now should trade at 13% yield. Note I am using dividend yield as a simplified proxy for FCF, which is somewhere in the range of $120MM-$150MM per annum (to LLC, not Inc, so cut this in half)

Risks

  • Further decline in theater attendance
  • Weakening in pricing power if the US moves due to impact of reserved seating/online ticketing. Advertisers may be worried that nobody will watch the pre-shows (which start 30 minutes before the advertised movie start time) if this happens
  • AMC somehow finds a way to wiggle out of its contract with NCMI as once it only owns <5% of NCMI, LLC interests are less aligned
  • The threat of cinemas losing their exclusive right to screen movies a couple of months before DVD/other releases
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