RBC Slashes Cineplex Outlook As Major C$2.8B Deal Terminated


Following Cineworld’s (CNWGY) termination of the C$2.8 billion arrangement agreement to acquire Cineplex (CPXGF), RBC Capital’s Drew McReynolds takes a notably more bearish perspective on Canada’s biggest cinema chain.

He lowers his Cineplex price target to C$13 (3% downside potential) from C$34 previously and calls the risk profile of the stock ‘speculative’ given the many “known unknowns” that currently exist across the COVID-19-disrupted theatrical exhibition, leisure and entertainment, and advertising industries.

“We expect Cineplex to trade back to fundamental value (notwithstanding any option value on potential compensation arising from litigation)” stated McReynolds. That comes alongside a hold rating.

According to the analyst, Cineplex does have adequate liquidity to weather the COVID-19 disruption, assuming box office reopens in Q3/20 on a sustained basis, with box office attendance per screen steadily increasingly through the end of 2021E.

“We do expect net debt/EBITDA as of Q2/20 to exceed the current covenant given the disruptive impact of a shuttered box office and entertainment and leisure industry on EBITDA in Q2/20” he warned.

However, consistent with other theatrical exhibitors (AMC, Cinemark, Cineworld), McReynolds expects Cineplex to obtain a temporary waiver from lenders and/or relaxed covenant ceilings through 2021.

“Based on our forecast and assuming no changes to available liquidity, we estimate as of Q2/20: (i) net debt of $700MM, up from $629MM in Q1/20 and implying a quarterly cash burn of ~$70–75MM; and (ii) available liquidity declining from $312MM in Q1/20 to $240MM” the analyst concluded.

UK-based Cineworld called off the agreement to snap up Cineplex citing “certain breaches” of contract, which Cineplex denied, stating that it will “vigorously defend any allegation to the contrary.”

“Cineplex believes that Cineworld’s allegations represent buyer’s remorse, and are an attempt by Cineworld to avoid its obligations under the [agreement] in light of the COVID-19 pandemic,” the company said. (See Cineplex stock analysis on TipRanks).

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