Real Estate Monetization And Cinema Upgrades Will Improve Operations

Key Takeaways

• Debt reduction through real estate monetization and cinema closures aims to improve net margins and profitability.
  
• High real estate occupancy and cinema upgrades are expected to boost revenue and customer engagement.
  
• Heavy reliance on cinema revenue and macro disruptions pose risks to earnings, while debt refinancing and asset sales could improve liquidity amid currency fluctuation challenges.

Catalysts

Focuses on the ownership, development, and operation of entertainment and real property assets in the United States, Australia, and New Zealand.

• Reading International is prioritizing debt reduction by monetizing real estate assets like the Wellington and Cannon Park properties. This strategy is expected to decrease interest expenses, thereby improving net margins and earnings.
  
• The company’s real estate division continues to provide a stable revenue stream, with a high occupancy rate (96%) in its Australian and New Zealand portfolios. This is likely to contribute positively to overall revenue and operating income.
  
• Reading is proactively closing underperforming cinemas and focusing on profitable operations, which is anticipated to enhance future profitability and operating margins.
  
• There is a robust slate of upcoming blockbuster films for 2025 that is expected to increase cinema attendance, thereby boosting revenues from ticket sales and food and beverage (F&B) spend per patron.
  
• The company is investing in improving customer experiences through cinema upgrades, loyalty programs, and enhanced F&B offerings. This focus on customer engagement and premium offerings is likely to support higher revenue and potentially improve net margins.

Reading International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Reading International's revenue will grow by 7.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from -16.8% today to 0.1% in 3 years time.
• Analysts expect earnings to reach $338.0 thousand (and earnings per share of $0.01) by about May 2028, up from $-35.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 214.8x on those 2028 earnings, up from -0.8x today. This future PE is greater than the current PE for the US Entertainment industry at 23.5x.
• Analysts expect the number of shares outstanding to decline by 0.64% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

Reading International Future Earnings Per Share Growth

Risks

• The company faced significant challenges due to global macro events like COVID-19 and the 2023 Hollywood strikes, which impacted cinema revenues and dragged down performance in early 2024. This could continue to affect revenue consistency if similar disruptions occur.
  
• Reading International is heavily reliant on its cinema business, which constitutes over 93% of revenue. Any prolonged downturn in cinema attendance or revenue could significantly impact overall earnings and net margins.
  
• The company has been closing underperforming cinemas, which, while potentially improving profitability, also leads to reduced gross revenue, impacting total revenue figures negatively.
  
• Reading International is working to lower interest expenses by refinancing debt and selling real estate assets. However, changes in the real estate market or failure to close planned sales could adversely affect liquidity and earnings.
  
• Currency fluctuations, as seen in the Australian and New Zealand dollar declines, can negatively impact revenue from international operations, which poses a risk to net margins and overall financial performance.

Valuation

• The analysts have a consensus price target of $2.5 for Reading International based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $258.0 million, earnings will come to $338.0 thousand, and it would be trading on a PE ratio of 214.8x, assuming you use a discount rate of 11.4%.
• Given the current share price of $1.27, the analyst price target of $2.5 is 49.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.