The fate of live cinema in the post-pandemic, post-Netflix era is a matter of some debate among investors. Recent visits to the cinema in the UK have shown that the punters are indeed creeping back, and that there is something in the cinema experience that home entertainment simply can’t beat.
Thousands of investors stuck faithfully with Cineworld during the pandemic, but have seen the shares crater over the last couple of years, with the company entering a lengthy financial restructuring process in 2022. You would be tempted to argue that the writing was on the wall for cinemas, if it was not for IMAX.
What is making IMAX stand out?
IMAX [NYSE:IMAX] is one of the most financially robust and attractive stocks in the North American cinema sector at the moment. It recently announced Queen Rock Montreal, the biggest IMAX concert film opening ever, which remasters a 1981 Queen concert. It is aiming at a $4.1m box office take, which, while modest compared to movies, illustrates some of the directions in which cinema can continue to expand.
IMAX is competing in a relatively buoyant North American entertainment market, with companies like Sphere and Vivid Seats putting out good numbers as well. But the share price does not reflect the IMAX underlying fundamentals. IMAX stock slipped off the $20 level in New York in October, and is now trading at $14.13. It’s not the car wreck of Cineworld, but it is not reflective of the IMAX fundamentals either.
The financials published by IMAX for Q3 were encouraging. The strong results conveyed remarkable strength in terms of value, growth, and income factors. These above-average numbers make a strong case overperformance and for anticipating significant upside potential.
The PE ratio of just over 30x may indicate that the market still considers IMAX a little too expensive and we are in the course of a re-rating exercise here, but there is more to consider here.
IMAX China: the jewel in the crown?
IMAX has proposed to acquire all the shares in its China operation, IMAX China, which trades in Hong Kong. Last July IMAX entered into a scheme of arrangement to acquire the remaining 28% stake in IMAX China Holding. The bid to take outright control was defeated by shareholders in October. Some institutional investors were said to be unhappy with the deal. Its failure seems to have had a knock on effect on the parent company’s stock price as well.
IMAX is something of a conundrum for investors. Just taking the China operations as an example, while the Hong Kong-listed stock has plunged since it listed in 2015, the number of cinemas operated by IMAX China, including in Taiwan and Macau, has expanded from 251 to 794, despite the pandemic and China’s zero COVID policy. IMAX has less than 450 operational in the entire North American market by contrast.
It is no surprise therefore to see institutional investors energised on the pricing proposed for the IMAX China takeover. Canadian investment firm Letko Brousseau & Associates reckons IMAX is being opportunistic in terms of the timing of the bid for IMAX China.
While IMAX owns over 71% of the Asian operation, the current Hong Kong share price obviously makes this an ideal time to acquire the rest. IMAX has to wait 12 months before it can renew its Asian privatisation bid, due to Hong Kong stock exchange regulations.
Asia could really be where it is at for IMAX over the next few years. Letko Brosseau thinks the share price is extremely depressed and that this is a buying opportunity. Many investors will be watching for the next move IMAX makes for its China jewel in the crown.