23.09.2016, 18:15
Fitch Affirms Regal's IDR
OREANDA-NEWS. Fitch Ratings has affirmed the Issuer Default Ratings (IDRs) of Regal Entertainment Group (Regal) and Regal Cinemas Corporation (Regal Cinemas) at 'B+'. All other issue ratings have been affirmed. The Rating Outlook remains Stable. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
Regal's ratings reflect Fitch's belief that movie exhibition will continue to be a key promotion window for the movie studios' biggest/most profitable releases.
Following a year of record box office sales, 2016 is off to a solid start with growth of 0.4% for the first half of the year, according to Box Office Mojo. During 2015, industrywide attendance grew 4.1% and average ticket prices grew 3.1%, which is likely attributable to higher premium ticket sales. Similar to past years, the 2016 film slate features many high-profile tent poles and anticipated sequels that have a strong likelihood of box office success, some of which have already proven to be domestic and international successes. "Girl on the Train," "Fantastic Beasts and Where to Find Them" and "Rogue One: A Star Wars Story" headline a strong film slate for the remainder of 2016. Fitch believes the film slate will support industry-wide box office revenue levels with flat attendance and a slightly increased average ticket price.
Fitch believes that the 2017 film slate looks solid with films such as "Pirates of the Caribbean: Dead Men Tell No Tales," "Fast and Furious 8," "Thor: Ragnarok" and "Star Wars: Episode VIII." Fitch believes that attendance may grow in the low single digits.
Fitch expects 2016 average ticket prices to be up in the low single digits, driven mostly by a low single-digit increase in base ticket prices, with the average ticket price contribution from premium formats relatively flat to slightly up. After annual growth of roughly 4.5%-5.0% in 2008-2010, ticket price growth has been modest at 2.1%, 0.5% and 3.2% in 2013, 2014 and 2015, respectively. Fitch attributes growth in 2013 and 2015 to a higher number of films released in Premium Large Formats (PLF).
Fitch believes the investments made by Regal and its peers to improve the patron's experience are prudent. Regal plans to outfit 30% of its total screens with reclining seats by year-end 2017 and continue to expand enhanced food and beverage menus. While high-margin concessions may be pressured, Fitch believes that, in the long term, the exhibitors will benefit from delivering an improved value proposition to its patrons, and premium food services and/or offerings will grow absolute levels of revenue and EBITDA.
Regal's solid liquidity position is supported by interest coverage that generally remains at or above 3.0x, annual pre-dividend free cash flow (FCF) between $150 million and $300 million, and a favourable near-term maturity schedule. Fitch's base case projects the company to roughly generate around $200 million in pre-dividend FCF in 2016 and 2017. Fitch expects cash deployment to be used towards investments into premium seating and concessions, acquisitions and shareholder friendly actions.
The ratings factor the intermediate- to long-term risks associated with increased competition from at-home entertainment media, limited control over revenue trends, shrinking film distribution windows and increasing indirect competition from other distribution channels (VOD, OTT, and streaming services). For the long term, Fitch continues to expect that the movie exhibitor industry will be challenged in growing attendance, and any potential attendance declines will offset some of the growth in average ticket prices and growth in concessions.
In addition, Regal and its peers rely on the quality, quantity, and timing of movie product, all factors out of management's control.
KEY RATING DRIVERS
Regal's ratings reflect Fitch's belief that movie exhibition will continue to be a key promotion window for the movie studios' biggest/most profitable releases.
Following a year of record box office sales, 2016 is off to a solid start with growth of 0.4% for the first half of the year, according to Box Office Mojo. During 2015, industrywide attendance grew 4.1% and average ticket prices grew 3.1%, which is likely attributable to higher premium ticket sales. Similar to past years, the 2016 film slate features many high-profile tent poles and anticipated sequels that have a strong likelihood of box office success, some of which have already proven to be domestic and international successes. "Girl on the Train," "Fantastic Beasts and Where to Find Them" and "Rogue One: A Star Wars Story" headline a strong film slate for the remainder of 2016. Fitch believes the film slate will support industry-wide box office revenue levels with flat attendance and a slightly increased average ticket price.
Fitch believes that the 2017 film slate looks solid with films such as "Pirates of the Caribbean: Dead Men Tell No Tales," "Fast and Furious 8," "Thor: Ragnarok" and "Star Wars: Episode VIII." Fitch believes that attendance may grow in the low single digits.
Fitch expects 2016 average ticket prices to be up in the low single digits, driven mostly by a low single-digit increase in base ticket prices, with the average ticket price contribution from premium formats relatively flat to slightly up. After annual growth of roughly 4.5%-5.0% in 2008-2010, ticket price growth has been modest at 2.1%, 0.5% and 3.2% in 2013, 2014 and 2015, respectively. Fitch attributes growth in 2013 and 2015 to a higher number of films released in Premium Large Formats (PLF).
Fitch believes the investments made by Regal and its peers to improve the patron's experience are prudent. Regal plans to outfit 30% of its total screens with reclining seats by year-end 2017 and continue to expand enhanced food and beverage menus. While high-margin concessions may be pressured, Fitch believes that, in the long term, the exhibitors will benefit from delivering an improved value proposition to its patrons, and premium food services and/or offerings will grow absolute levels of revenue and EBITDA.
Regal's solid liquidity position is supported by interest coverage that generally remains at or above 3.0x, annual pre-dividend free cash flow (FCF) between $150 million and $300 million, and a favourable near-term maturity schedule. Fitch's base case projects the company to roughly generate around $200 million in pre-dividend FCF in 2016 and 2017. Fitch expects cash deployment to be used towards investments into premium seating and concessions, acquisitions and shareholder friendly actions.
The ratings factor the intermediate- to long-term risks associated with increased competition from at-home entertainment media, limited control over revenue trends, shrinking film distribution windows and increasing indirect competition from other distribution channels (VOD, OTT, and streaming services). For the long term, Fitch continues to expect that the movie exhibitor industry will be challenged in growing attendance, and any potential attendance declines will offset some of the growth in average ticket prices and growth in concessions.
In addition, Regal and its peers rely on the quality, quantity, and timing of movie product, all factors out of management's control.
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