Still bullish on Reading International – here’s why

Cheng YuanAuthor: Cheng Yuan

Covestor model: Value with Catalyst

Disclosure: Long RDI

The significant cash position I held in the model portfolio in August helped it outperform both the Russell 3000 and S&P 500 by a small margin for the month. But clearly, outperforming the benchmarks by losing less than the benchmarks is a lousy way to actually make money. The good news is that with cash in hand and a handful of opportunities I’m eyeing, the market volatility may offer up attractive opportunities for new positions.

Last month, Reading International (NYSE: RDI) was one of the biggest losers in the model portfolio holdings. In August, Reading stock had a brief but sharp drop and ended up slightly lower than where it started at the beginning of the month. (Google Finance: http://bit.ly/oJunGo)

There were quite a few events surrounding Reading that I’d like to share. On August 4th, Reading reported 2011 Q2 earnings that were nothing short of spectacular.[1] Total revenues from cinema exhibition and real estate segments grew 17.7% over the same quarter last year. EBITDA from the quarter was 90.5% higher than same quarter last year. With the 60% growth in book value from last quarter, the gap between where the stock currently trades and the book value – understated due to years of appreciation on its long-held real estate – has, in fact, widened.

Along with the growth of top and bottom lines, Reading reported that it had reclassified the Burwood parcel that was previously held for sale back into a long term asset. While many shareholders would consider this a negative, it is important to recognize that this is due to a GAAP accounting requirement since no significant commitment to purchase has been made for more than one year.[2] I don’t believe the value of the Burwood parcel has changed since I last reported it based on recent appraisals provided by management.[3][4]

Also buried in the 2011 Q2 10-Q filing, Reading reported that it has repurchased 22,300 shares at an average price of $4.98/share, significantly above where the stock currently trades (as of 9/2/11). While the shares repurchased represent a small portion of outstanding shares, it is refreshing to see that management is committed to act in the best interest of the shareholders. With abundant liquidity in hand, I won’t be surprised to see more share repurchases in the near future. For an excellent summary of the key takeaways in Reading’s latest 10-Q, I highly recommend reading “Reading International: Strong Q2 Bests Public Peers; Real Estate Remains Undervalued” by Andrew Shapiro of Lawndale Capital Management (8/17/11, Seeking Alpha, http://seekingalpha.com/article/287867-reading-international-strong-q2-bests-public-peers-real-estate-remains-undervalued)

Reading also reported that it has recently acquired a 17-plex theater in Murrieta, CA. Considering that Reading advanced a loan to the seller, Sanborn Theaters, as part of the acquisition and that the Sanborn family has been disposing assets in its estate following the death of a family member, it is likely that Reading got a pretty good deal on the cineplex.[5]

Last but not least, what could be better than to end this month’s commentary than a bit of speculation in this environment rife with uncertainty. According to a recent article in Mergermarket, Reading could attract takeover interest based on its real estate and cinema assets.[6] Though chances of a takeover seem remote in the near term due to the low trading price of the stock and the voting control of Chairman, Jim Cotter, the valuation of the company suggested by the shareholders in the article should highlight some of the value that could be unlocked should an takeover occur.

Sources:

[1] Reading International Announces Record Quarterly Revenue, Reading International, http://www.readingrdi.com/pdf/2011-08-04%20Earnings%20Q2%202011.pdf, August 4, 2011
[2] Reading International Clarifies Burwood Position, Reading International, http://www.readingrdi.com/pdf/2011-08-04%20Burwood%20Disclosure%20Press%20Release.pdf, August 4, 2011
[3] Reading International’s underappreciated value – Cheng Yuan (RDI), 6/22/11 http://investing.covestor.com/2011/06/reading-internationals-underappreciated-value-cheng-yuan-rdi
[4] Reading International 2011 Annual Shareholders Meeting Press Release, http://www.sec.gov/Archives/edgar/data/716634/000071663411000012/exhibit99_1.htm, May 24, 2011
[5] Sanborn Theatres to Explore Strategic Business Alternatives, Sanborn Theaters, http://www.businesswire.com/news/home/20110314005224/en/Sanborn-Theatres-Explore-Strategic-Business-Alternatives, March 14, 2011
[6] Reading International could attract takeover interest based on real estate and cinema assets, shareholders say, http://www.mergermarket.com/pdf/mm_RDI_Story.pdf, Mergermarket, August 10, 2011