TRIS Rating has upgraded the company rating of Major Cineplex Group PLC (MAJOR) and the rating of the company’s outstanding senior unsecured debentures to “A” from “A-” with “stable” outlook. The upgrades come from the company’s ability to stabilize its cash flow generation in tandem with screen expansion and the strong performance of its advertising business, which is outpacing overall advertising industry. The ratings also reflect the company’s leading position in the Thai movie exhibition industry, the prime locations of its properties throughout the country, and its capable management team. These strengths are partially offset by MAJOR’s exposure to uncontrollable factors, such as the number of films released, film popularity, the risk of increasing competition from the proliferation of entertainment alternatives, and film piracy.
The “stable” outlook reflects the expectation that MAJOR will maintain the leading market position in the movie exhibition industry and sustain a satisfactory performance. A rating upgrade is unlikely over the next 12-18 months but the rating could be upgraded if the company could substantially enlarge operating cash flow while maintaining leverage at the current level. The rating downside case may occur if the aggressive use of debt to finance investments causes a significant deterioration in the financial profile.
MAJOR is the largest movie exhibitor in Thailand, with approximately 70% market share in terms of first-week box office sales. The company was founded in 1995 by Mr. Vicha Poolvaraluck, who currently owns 32% of the shares outstanding. MAJOR’s five principal lines of business are cinema exhibition, bowling and karaoke, advertising media, space rental and services, and movie content. The cinema exhibition and the advertising media segments are the key revenue contributors. In the first nine months of 2016, the cinema exhibition segment comprised 72% of total revenue, while the advertising media segment made up 15%. The three remaining segments each contributed around 5% of total revenue.
As of September 2016, MAJOR operated 101 cinemas, offering a total of 641 screens. MAJOR currently has 340 cinema screens in Bangkok and vicinity, 285 screens upcountry, and 16 screens overseas. MAJOR currently has 14 branches which offer bowling and karaoke, operating 257 bowling lanes, 148 karaoke rooms, and five ice skating rinks. MAJOR owns five stand-alone movie complexes, which offer commercial space for rent of 50,778 square meters (sq.m.). Other than its stand-alone complexes, MAJOR has located its theaters adjacent to modern trade retail outlets and department stores. MAJOR uses several cinema brands to capture a broad range of customer groups.
MAJOR’s solid business profile is partly supported by its strong relationships with film distributors and the large number of theatre screens it has nationwide. Admission revenue is driven by the number of films released as well as the quality and popularity of the films. Adding new branches is one key success factors for movie exhibitors because more branches make the movie screens more accessible to customers. However, movie exhibitors face threats from product substitution, for example, home entertainment, mobile Internet, and other recreational activities. However, no other form of entertainment is as yet a perfect substitute for the movie-going experience.
In 2015, MAJOR reported Bt8,580 million in revenue, a slight decline from the previous year. The drop was mainly due to the termination of the DVD and VCD distribution business. For the first nine months of 2016, MAJOR’s total revenue increased by 3.7% year-on-year (y-o-y) to Bt6,850 million. The growth was supported by increases in box office revenue and concession sales, driven by a number of popular Hollywood films plus 65 new screens. The ratio of operating income before depreciation and amortization to sales improved from 28.9% in 2014 to 31% in 2015 and 32.9% in the first nine months of 2016. The cinema exhibition segment contributed approximately 56% of MAJOR’s EBITDA (earnings before interest, tax, depreciation, and amortization), while the rest was contributed by the advertising media segment. As the advertising media business incurred minimal additional costs to theater operation, it generates a substantial contribution to the company's bottom line.
MAJOR’s total debt increased from Bt4,676 million in 2015 to Bt5,212 million at the end of September 2016 in tandem with its ongoing expansion. The total adjusted debt to capitalization ratio increased from 61% in 2015 to 62% for the first nine months of 2016. The liquidity profile is considered satisfactory. Funds from operations (FFO) was Bt1,794 million in 2015 and stood at Bt1,581 million for the first nine months of 2016. The FFO to total debt ratio increased from 19.2% in 2015 to 22.2% (annualized, from the trailing 12 months) as of September 2016. The EBITDA interest coverage ratio improved, rising from 4.5 times in 2015 to 5.1 times in the first nine months of 2016. During the next 12 months, MAJOR has to repay financial obligations of Bt4,346 million, of which Bt3,009 million is short-term debt and Bt1,336 million is maturing long-term debt. As of 30 September 2016, the company had Bt551 million in cash on hand and Bt3,220 million in unused credit facilities from several banks which serve as flexibility to support its financial obligations. As of September 2016, the market value of MAJOR’s strategic investments was Bt6,982 million in total, derived from shareholdings in M Pictures Entertainment PLC (MPIC), Siam Future PLC (SF), Major Cineplex Lifestyle Leasehold Property Fund (MJLF), and PVR Ltd. The high market value of these investments acts as a cushion for MAJOR, if additional financial flexibility is needed.
During 2017-2019, TRIS Rating forecasts MAJOR’s total revenue to grow at a solid rate, supported by a strong movie line-up and an ongoing plan to add more cinemas. MAJOR’s operating profit margin is forecast to stay at around 30%. MAJOR plans to increase the number of cinema screen to 1,000 screens by 2020. The expansion plan calls for MAJOR to invest around Bt1,100-Bt1,200 million per annum during 2017-2019. The company has budgeted approximately Bt400 million each year to produce Thai movies and acquire international film rights. In addition, the company plans to make a tender offer, worth Bt2,656 million, for 24% of SF’s shares. Hence, MAJOR’s leverage ratio will rise to around 65% in 2017 and will decline to 60% in 2019. FFO is expected to exceed Bt2,000 million. The FFO to total debt ratio will be around 22% and the EBITDA interest coverage ratio will stay around 4.5 times.
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