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postheadericon Is the German Cinema Market Coming Good At Last? And Is CinemaxX the Cheapest Exhibition Stock in Europe?

Since reunification Germany’s cinema market has had a floor of around 125 million admissions a year. Given that last year’s 126.6 million admissions barely crept above this level – and those for the first half of 2011 are reported to be just 2.2% higher than the corresponding period in 2010 – it might seem odd to see anything very positive going on in this market.

In fact there is. Germany’s screen count is falling, slowly and steadily. The last five years have seen 4% of screens go, and this holds out the promise of at least an improvement in profitability. As noted in our recent Cinemagoing North West Europe report: “ The key to this almost certainly lies in getting the balance between the numbers of cinemas and the audience right – that is, in eliminating the over-screening that is such a bugbear in this market. This would allow the best operators to embark on much-needed consolidation strategies and spread improvements in marketing and operating strategies across the industry, and perhaps finally find the answer to the question of why Germans do not go to the cinema.”

Taking even a little bit of excess capacity out of the market can have a marked impact on profits. Cinemaxx, the second-largest circuit, saw its pre-tax profits climb to €17.6 million in 2010, from a loss of €4.4 million only two years before, despite higher industry-wide admissions in the earlier year.

Indeed, CinemaxX is starting to look as though it might be a good investment. At it’s share price of €3.30, almost three times the level of two years ago, the company’s Enterprise Value, including net debt of €73 million, comes out at €160 million, just 4.25 times its EBITDA of €37.5 million, while diluted earnings per share of €1.05 give a historic P/E of 3.15. Following further progress in the first half of 2011, CinemaxX stock seems relatively inexpensive despite the absence of a dividend.

Compare Belgium’s Kinepolis Group: at around €54, the shares trade on a multiple of EBITDA to Enterprise Value of about 6.8 times, though as previously noted in this blog, land and buildings valued at €197 million owned by the company form a significant proportion of its enterprise value of €434 million. Excluding these assets the company’s EV/EBITDA multiple falls to around 3.7 times, although executing the series of transactions (sale and leaseback of the property, return of cash to shareholders) needed to realise this hidden value would not yield such a precise result, nor is it likely to happen under the current management, whose strategy is explicitly based on owning the properties from which it trades.

Kinepolis arguably offers slightly better value, though not the continuing recovery prospects of CinemaxX. Britain’s Cineworld, a pure cinema operating company which owns no property, on an EV/EBITDA multiple of 6.3 times at a share price of £1.90 looks unequivocally more expensive. The dividend yield of over 5% offered by the company may be a factor. But a lack of cross-border traffic in investment in these small cinema exhibitors also seems a candidate for explaining why valuations vary so widely. And of course the problems of the Euro may also be relevant.

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