One of my big losers last year was Reading (RDI, Financial). The stock was down ~20% from my initial purchase price and has lagged the market in the big January run up. Given the stock is one of the five biggest positions in my portfolio and currently represents ~10% of my portfolio (and represented 20-25% when I initially invested), it obviously was a pretty big drag on performance. It’s disappointing when you have a position under perform like this (though I definitely had one or two much bigger dogs!), and there’s a temptation to just sell the stock without regard for the fundamentals. To keep myself from doing that, and prepare for next month’s release of their full year results, I thought I’d revisit and revalue the company. Plus, I haven’t mentioned them in quite a while, so new readers may be interested in the name.
Reading has two divisions: their real estate holdings and their cinema business. They currently trade for about ~0.8x BV, but given that I don’t think either division is worth what they are on the book value (especially the cinema business), I think that gives an investor at today’s prices an opportunity to buy the company at a massive discount to its true intrinsic value.
Let’s start with the cinema business. The easiest way to value this business is to value it based on the multiples its competitors are receiving.
You can see the four publicly traded comps RDI compares themselves to in slide 13 of this presentation. For my purposes, I’m going to drop Marcus (MCS) from the comparison because they (like RDI) have significant real estate holdings, as well as a hotel division. Because the other three companies (RGC, CKEC, CNK) are exclusively cinema companies and all of them lease 70-85% of their theaters, the multiples the market assigns them is basically a perfect proxy for the multiple a pure cinema company should receive.
Because of differences in land ownership and potential differences in accounting and depreciation, I’m going to use EV / Revenue as the best indicator of value. Per yahoo! fianance, CKEC trades for EV / revenue of just over 0.8x, RHC trades for 1.4x, and CNK just under 1.6x. CKEC is clearly the outlier here, and their EV is likely reflecting significant chances of distress (plus perhaps a discount for their small size)- they have over $300m in debt and capital leases on their books versus $400m in assets, quite a significant amount of leverage. (Note that MCS currently trades for 1.6x).
RDI’s cinema revenue for past twelve months comes in at $223m (having grown ~7.5% YoY). Applying the range of multiples would give the cinema division a value $180m to $357m. Dropping CKEC from the peer set would narrow the range to $310m to $357m for the cinema division.
Given that RDI’s current EV is $285m, this valuation would imply that a buyer at today’s prices would be picking up the cinema division at a nice discount and grabbing all of RDI”s potentially very valuable real estate for free.
So what’s the real estate worth?
The land alone is on the books for almost $150m. In addition, the buildings have a gross book value (before depreciation) of $143m. Clearly, there’s a good deal of value here.
I’ve previously covered how I think there’s a very good chance that the market value of their land and buildings are higher, perhaps significantly higher, than their book value. But for conservatism, let’s say their real estate is worth $150-200m (again, the land is on the books for $150m and is likely understated, so this is a VERY conservative valuation).
So, if we add these two together, we get a low end valuation for the company of $330m and a high end of almost $560m. Dropping CKEC would put the low end at $460m and the high end at $560m.
RDI had net debt of $168m at their last balance sheet. Taking that out would give us with a range of $290m-390m in market cap ($162m using CKEC’s multiple). With ~23m shares outstanding, that implies a share price of $12.30 – $16.95. Even using the super depressed CKEC multiple would imply a share price over $7.00.
You can play with the numbers yourself; I’ve previously used EV / EBITDA for the cinema division and come to very similar conclusions. However you look at the numbers though, the only way to get to a value that even approaches today’s price is to a) use a distressed multiple for their cinema division and b) apply a significant haircut to their land holdings. (Just so you don’t think the numbers are too crazy, RDI consistently traded in the $8-10 range before the financial crisis, and they’ve significantly increased their value since then)
Some readers may worry about RDI’s leverage, as they do have a good bit of debt on their books. However, the vast majority of their debt doesn’t mature until 2014-2015, Reading’s cinema division products excellent free cash flow and will allow them to significantly pay down debt over the next two-three years (before the next refinancing), and most of their properties don’t have mortgages against them, so in a crunch they could use the properties to raise cash. In other words, while I’m normally weary of leverage, it doesn’t concern me in this case.
Finally, there are a couple of catalysts on the horizon.
I’ve previously mentioned the potential for a Burwood sale and how the company could be an attractive candidate for an acquisition (a P.E. firm, for example, could buy them at a nice premium and immediately sell their cinema division to a competitor. The competitor could likely realize big synergies from the purchase, and the P.E. firm could basically completely pay for the purchase price through the sale and leave themselves with a good bit of valuable real estate), so I won’t go over them. Instead, I want to mention something that was buried in an 8-K filed at the start of the year- the company repurchased a block of 100k shares at the end of the year.
That repurchase brings their total repurchases for the year to just under $750k (assuming that this was the only repurchase they did in Q4. It could be higher if they were buying more shares in the open market.). While still a small amount for a company w/ ~$100m market cap, this is the most aggressive the company has been with share repurchases in its history. With their remaining tax liabilities mostly settled and a strong liquidity position, plus the eminent sales of several valuable properties, it wouldn’t surprise me to see the company increase its open market repurchases in 2012. Doing so could create a great deal of value if done in large enough size at today’s prices.
Whether the share repurchases materialize or not, RDI trades at such a huge discount to peers that I’m content to simply hold it and wait for a revaluation. If shares continue to trade at these levels, I’ll likely continue to add to my position as cash frees up in my portfolio.
Disclosure- Long RDI
Reading has two divisions: their real estate holdings and their cinema business. They currently trade for about ~0.8x BV, but given that I don’t think either division is worth what they are on the book value (especially the cinema business), I think that gives an investor at today’s prices an opportunity to buy the company at a massive discount to its true intrinsic value.
Let’s start with the cinema business. The easiest way to value this business is to value it based on the multiples its competitors are receiving.
You can see the four publicly traded comps RDI compares themselves to in slide 13 of this presentation. For my purposes, I’m going to drop Marcus (MCS) from the comparison because they (like RDI) have significant real estate holdings, as well as a hotel division. Because the other three companies (RGC, CKEC, CNK) are exclusively cinema companies and all of them lease 70-85% of their theaters, the multiples the market assigns them is basically a perfect proxy for the multiple a pure cinema company should receive.
Because of differences in land ownership and potential differences in accounting and depreciation, I’m going to use EV / Revenue as the best indicator of value. Per yahoo! fianance, CKEC trades for EV / revenue of just over 0.8x, RHC trades for 1.4x, and CNK just under 1.6x. CKEC is clearly the outlier here, and their EV is likely reflecting significant chances of distress (plus perhaps a discount for their small size)- they have over $300m in debt and capital leases on their books versus $400m in assets, quite a significant amount of leverage. (Note that MCS currently trades for 1.6x).
RDI’s cinema revenue for past twelve months comes in at $223m (having grown ~7.5% YoY). Applying the range of multiples would give the cinema division a value $180m to $357m. Dropping CKEC from the peer set would narrow the range to $310m to $357m for the cinema division.
Given that RDI’s current EV is $285m, this valuation would imply that a buyer at today’s prices would be picking up the cinema division at a nice discount and grabbing all of RDI”s potentially very valuable real estate for free.
So what’s the real estate worth?
The land alone is on the books for almost $150m. In addition, the buildings have a gross book value (before depreciation) of $143m. Clearly, there’s a good deal of value here.
I’ve previously covered how I think there’s a very good chance that the market value of their land and buildings are higher, perhaps significantly higher, than their book value. But for conservatism, let’s say their real estate is worth $150-200m (again, the land is on the books for $150m and is likely understated, so this is a VERY conservative valuation).
So, if we add these two together, we get a low end valuation for the company of $330m and a high end of almost $560m. Dropping CKEC would put the low end at $460m and the high end at $560m.
RDI had net debt of $168m at their last balance sheet. Taking that out would give us with a range of $290m-390m in market cap ($162m using CKEC’s multiple). With ~23m shares outstanding, that implies a share price of $12.30 – $16.95. Even using the super depressed CKEC multiple would imply a share price over $7.00.
You can play with the numbers yourself; I’ve previously used EV / EBITDA for the cinema division and come to very similar conclusions. However you look at the numbers though, the only way to get to a value that even approaches today’s price is to a) use a distressed multiple for their cinema division and b) apply a significant haircut to their land holdings. (Just so you don’t think the numbers are too crazy, RDI consistently traded in the $8-10 range before the financial crisis, and they’ve significantly increased their value since then)
Some readers may worry about RDI’s leverage, as they do have a good bit of debt on their books. However, the vast majority of their debt doesn’t mature until 2014-2015, Reading’s cinema division products excellent free cash flow and will allow them to significantly pay down debt over the next two-three years (before the next refinancing), and most of their properties don’t have mortgages against them, so in a crunch they could use the properties to raise cash. In other words, while I’m normally weary of leverage, it doesn’t concern me in this case.
Finally, there are a couple of catalysts on the horizon.
I’ve previously mentioned the potential for a Burwood sale and how the company could be an attractive candidate for an acquisition (a P.E. firm, for example, could buy them at a nice premium and immediately sell their cinema division to a competitor. The competitor could likely realize big synergies from the purchase, and the P.E. firm could basically completely pay for the purchase price through the sale and leave themselves with a good bit of valuable real estate), so I won’t go over them. Instead, I want to mention something that was buried in an 8-K filed at the start of the year- the company repurchased a block of 100k shares at the end of the year.
That repurchase brings their total repurchases for the year to just under $750k (assuming that this was the only repurchase they did in Q4. It could be higher if they were buying more shares in the open market.). While still a small amount for a company w/ ~$100m market cap, this is the most aggressive the company has been with share repurchases in its history. With their remaining tax liabilities mostly settled and a strong liquidity position, plus the eminent sales of several valuable properties, it wouldn’t surprise me to see the company increase its open market repurchases in 2012. Doing so could create a great deal of value if done in large enough size at today’s prices.
Whether the share repurchases materialize or not, RDI trades at such a huge discount to peers that I’m content to simply hold it and wait for a revaluation. If shares continue to trade at these levels, I’ll likely continue to add to my position as cash frees up in my portfolio.
Disclosure- Long RDI
