Valuation looks fair based on historical 12 months.
They actually have net income for last twelve months, but it's not much so PE looks silly. However, I checked the depreciation policy and it is very conservative. They basically write-off the equipment they buy against each contracted episode. Each TV series is set-up as a seperate company and, not knowing if there will be a season 2,3,4... they make the initial series buy the equipment. Obviosuly, as they go along and add more shows, they will not have to equip an equal number of production suites, yet they will still charge for the usage of the asset. Profits should grow much greater the more shows and the more seasons. Anyway, it depresses reported earnings, but is a safe way to manage the finances of the company. Cash flow is healty too because of they bill for production with a guaranteed margin build in.
Any way --the numbers with my estimates for the next 12 months:
96 numbers: (Price is actually Enterprise Value (equity+debt-cash)
Price/EBITDA - 9.1x
Price/Sales - 5.5x
96 Comparables:
Cinar: 22x EBITDA, 5.4x sales
Pixar: 43x EBITDA, 14.4x sales
Nelvana: 9.bx ebitda, 1.8x sales
Eng Anim: 14x ebitda, 4.4x sales
My estimates for next year from guessing on projects:
EBITDA: C$17mil (up 41%)
Rev: 30mil (up 50%)
Actually understates progress because they can only book rev and income when they deliver a completed show (episodes) or movie. I assume they will announce at least one movie in the next 3-4 months and maybe 2 during the year. That will be huge for the company, but they cannot book the revenue probably till the next year when it's completed. A movie would provide about C$25-45 milllion in revenue (remember 96 rev is 20 mil) and EBITDA of C$10-20. The Warner Bros movie with Storyopolis would probably be in the C$35mil range. The IMAX one would be higher because it's more demanding. As you can see, either would be enormous for the company. Look at it as a backlog though, because it won't get booked right away. You can bet, the market will start discounting it immediately --hence why I think we'll make some good money on this over the next twelve months.
It's very easy to see what could lead to a double of this company, whose market cap is only US$109mil versus a Pixar, who will only be producing movies, no TV series,and producing them very slowly and already have a market cap of US$700mil. No doubt, Pixar's done well for the owners and DIsney, but you're not going to make your fortune off Pixar. MAINFRAME, could be a two- three bagger over the next few years and still only be half the market cap of Pixar. Let's put this in perspective. Pixar's revenues this year, which include a good deal of the TOy story video etc.. are only U$26 mil. Next year, with no movie hitting, they drop to $8mil and they loose $5mil (H&Q and R&S estimates) AND THEY HAVE A MARKET CAP OF $700MIL!. Give me the nice steady earning of Mainframe with 3 TV shows and ownership of all parts, IMAX Ridefiles, Movies, CD-ROM Games with Electronic Arts --all for US$109mil.
It's obvious where one can make money here. Don't forget the incredible growth opportunity for high quality children's entertainment. If you can't get any in the IPO, buy in aftermarket. It's not going to roar away, things just don't get stupidly hyped in Canada like here (re Pixar). |
