Before market open on Tuesday, IMAX (NYSE:IMAX) announced the sale of a 20 percent stake in IMAX China to strategic Chinese investors for $80 million. The purchase price will be paid in two equal installments, with the first expected to close on Tuesday, and the second in early 2015. IMAX China will continue to be a consolidated subsidiary of IMAX Corp. The investment by CMC Capital Partners (CMC), an investment fund, and FountainVest Partners (FountainVest), a private equity firm, provides for the sale and issuance of 20 percent of the shares in IMAX China (Holding.) Through the introduction of Chinese ownership, IMAX expects the transaction to eventually lead to an IPO of IMAX China at an unspecified time. IMAX China will have a nine-member Board of Directors with six IMAX executives, one CMC representative, one FountainVest representative, and an independent director.
IMAX listed a number of key goals for the transaction in Tuesday’s press release. These goals include the continued expansion of IMAX’s theater network in China, the sustained performance of IMAX’s Hollywood and Chinese titles, and strengthening of government and industry relationships in the country.
It is not clear to us that the addition of a strategic partner adds significant value, but the sale clearly establishes the value of IMAX China at $400 million. We have long believed IMAX China had significant value, but this transaction values its roughly 400 screens (173 installed and 237 backlog) at $1 million apiece. This is well below the $1.5 million per screen valuation for IMAX as a whole (based on 837 screens installed and a backlog of 407), and likely reflects the company’s lower-margin structure in China.
Conservative FY:14 installation guidance is underwhelming considering the large backlog. After installing 112 systems in 2013, IMAX expects to install roughly the same number of systems in FY:14 at the same install cadence as FY:13, which was back-end loaded. We view this range as very conservative given continued theater signings, a large backlog, and the underpenetrated nature of many markets, including China, Brazil, Russia, and Europe.
For the time being, we are maintaining our NEUTRAL rating and our 12-month price target of $28. Our price target reflects roughly 30x our FY:14 EPS estimate of $0.91. It is not clear that the IMAX China transaction unlocks significant value that wasn’t already reflected in IMAX’s share price, especially given the perscreen valuation. The stock appears primed to benefit from a strong release slate towards YE, as well as heavily back-end loaded installs and results.
Michael Pachter is an analyst at Wedbush Securities.