#Why Wall Street Likes Imax’s $124M Deal to Take Full Control Of Its China Unit

Wall Street analysts have given a thumbs-up to Imax’s $124 million planned deal to take full control of its Chinese unit.

Imax had unveiled the transaction to acquire the remaining 28.5 percent stake in its Shanghai-based subsidiary, or around 96.3 million shares currently trading on the Hong Kong Stock Exchange, on Wednesday. The company currently has about 770 branded commercial locations in the country, the most of any market worldwide and a key component of its expansion outside of North America.

Wall Street experts told investors that Imax’s attempt to highlight the value of its China business via a separate stock listing in the market has failed to play out as hoped. The decision to buy in the unit via a deal for full control therefore makes sense, but also comes with various positives, they argued.

Roth MKM analyst Eric Handler, who has a “buy” rating and $26 stock price target on Imax, for example, lauded the transaction, expected to close by the end of the year, for providing “attractive structural, financial, and strategic benefits.”

Expanding on the corporate structure impact of the proposed transaction, he explained: “Having 100 percent ownership of Imax China will help simplify Imax’s financial reporting and challenges in estimating the minority impact of the subsidiary on adjusted earnings before interest, taxes, depreciation and amortization (EBITDA). Furthermore, we believe Imax China was unable to realize its full value due to a severe lack of liquidity and low trading volume.”

Detailing the financial benefits of buying full control of Imax China, Handler highlighted that the change “should be immediately accretive to earnings.” In addition, Imax will benefit from about $2 million in cost savings from not operating a second publicly traded company, plus achieve “certain tax efficiencies and flexibility in group cash planning and usage.” The Imax China cash, which amounted to $78 million as of the end of the first quarter, “will now be able to be up-streamed and repatriated without any shareholder dividend leakage,” the analyst added.

Plus, Handler also outlined strategic benefits. “Full ownership of Imax China will increase Imax Corp.’s flexibility in pursuing certain growth initiatives in Greater China, as well as providing greater flexibility for long-term strategic options,” he wrote. For example, Imax wasn’t able to operate its SSIMWAVE streaming technology business in China because Imax China didn’t have any ownership in it.

B. Riley analyst Eric Wold also reiterated his “buy” rating and $27 price target on Imax shares following news of the planned China transaction, telling investors that it will allow the firm to “capture projected growth at an accretive valuation.”

Noting that Imax China shares “have not performed well” since their IPO in 2015, declining 73 percent, he said that the goal had been “to unlock value for Imax shareholders given the growth potential in that region and the opportunity for a China-specific trading vehicle to more appropriately highlight that value.” But Wold remains optimistic about the firm’s potential in China. “While we acknowledge the impact that the pandemic had on the short-term trajectory in the region, we believe the poor performance is more of a reflection of liquidity issues surrounding a minority stake in the subsidiary,” he argued. “While there have been some short-term growth headwinds in China coming out of the pandemic, we remain confident in the box office opportunity as local-language content availability expands and the 200 systems in backlog are installed and monetized.”

The analyst’s overall takeaway about the proposed deal: “We view this as a strong move by Imax that should eventually drive increased shareholder value in the years ahead.”

Wedbush Securities analyst Michael Pachter also expressed approval of the decision to take full ownership of Imax China in a report entitled: “Shares Undervalued While Imax Positioned for Growth.” Reiterating his “buy” rating and $26 price target on the stock, he wrote in his Thursday report: “Shares continue to trade at a discount, and should rise on positive box office momentum and the proposed acquisition of the remaining shares of Imax China.”

Pachter emphasized trends in China, noting: “Chinese box office is rebounding nicely, with several local-language titles on tap for the third quarter, including Never Say Never and Creation of the Gods. We expect several more international local-language titles to perform well in the coming quarters, including Studio Ghibli’s How do you Live?“

The Wedbush expert’s conclusion: “Imax remains on Wedbush’s Best Ideas list, given our view that Imax is 1) the best way to play the theatrical rebound in 2023 as it gains market share, 2) the best positioned to gain from consumers’ ongoing shift toward premium screens, 3) a solid way to position for the ongoing economic rebound in China, 4) and as it is expanding its relevance globally by expanding its local-language content (30-40 titles expected in 2023).”

Barrington Research analyst Jim Goss also mentioned in his report that Imax was on his firm’s Best Ideas list of stocks with upside. He dug deeper into Chinese film and exhibition business trends in maintaining his “outperform” rating and $24 target price on Imax’s stock. “The (Imax China) subsidiary has traded at a substantial discount to the parent company, despite in our view perhaps similar growth dynamics given the expectations for the overall screen base potential,” he pointed out.

“When Imax China was taken public on the Hong Kong exchange more than a half dozen years ago, the stock traded significantly higher,” Goss also recalled. “More recently, the stock has been much weaker. Imax Corporation had worked to foster robust relationships with the film industry in China as an important partner for many of the largest releases there. Part of the rationale for IPOing the subsidiary, and the sale of an interest nearly a decade ago, was a better integration of the unit with the Chinese economy and reduced political risk.”

While things may not have played out as hoped, the Barrington expert mentioned possible upside ahead. “There could be modest upward bias to our target price aspirations as this accretive transaction is worked into financial statements,” he concluded.

Meanwhile, Goldman Sachs analyst Stephen Laszczyk remains more bearish on Imax than peers, sticking to his “sell” rating and $15 stock price target.

But he also had a positive take on the China transaction, mentioning it was “financially accretive,” would bring “cost savings” and ensure “greater access to cash.” And the analyst wrote: “We view the use of capital in buying the remaining stake of Imax China as a strategic positive for Imax Corporation, as we believe Imax underutilized its balance sheet coming out of the pandemic.” While the company otherwise continues to list its two priorities for capital allocation as investing in growth and stock buybacks, Laszczyk also emphasized: “Notably, management stated that the acquisition of the remaining China shares would be more accretive than repurchasing its own shares at current levels.”