This article first appeared in The Edge Malaysia Weekly on June 18, 2018 - June 24, 2018

ASIA-focused private equity firm Navis Capital Partners is said to be looking at exiting cinema operator MCAT Box Office Sdn Bhd (MBO) to realise its investment made in April 2012, say sources familiar with the matter.

However, it is facing difficulties in finding a buyer, especially at the price it is seeking, they add.

A fund manager in the private equity industry says the valuation that Navis is looking at is “crazy”. The company wants to sell its MBO stake at an earnings before interest, taxes, depreciation and amortisation (Ebitda) multiple of 12 times.

“They have been trying to sell the stake for a long time. Maybe the price they want is too high,” comments the fund manager.

According to MBO’s 2016 annual report filed with the Companies Commission of Malaysia, it made a net profit of RM5.46 million on revenue of RM133.85 million in that financial year ended Dec 31.

Its Ebitda stood at RM9.74 million. So at 12 times Ebitda, Navis is eyeing around RM116.88 million for its MBO stake, which is just slightly over the RM104 million it had paid in 2012.

It is understood that Navis has invested a lot of money in MBO over the last six years. The latter now operates 213 screens across the country from just 111 in 2012.

Navis holds 92.7% equity interest in MBO via MGO NAF VI Cinematic Holdings Ltd, a company incorporated in Mauritius. It acquired a substantial stake from the cinema operator’s then owner Tan Sri Abdul Rashid Abdul Manaf and then injected capital into the company by subscribing for its new shares. Abdul Rashid’s stake currently stands at 7.3%.

In September 2012, Navis acquired BIG Cinemas’ nine locations in Malaysia from Indian tycoon Anil Ambani’s Reliance MediaWorks Ltd and merged them with MBO’s. No price or valuation was announced at the time.

In a statement that accompanies Navis’ announcement, Reliance MediaWorks CEO Anil Arjun says BIG Cinemas will benefit from the disposal through fresh capital injection.

“We are pleased to divest this business to Navis and Tan Sri Rashid Manaf. The nine cinemas in this transaction will complement their MBO cinemas circuit very well in terms of location coverage across Malaysia.

“The business will benefit from substantial scale and fresh capital injection, especially in the area of digitalisation to enhance the customer experience,” he says.

After having invested heavily in MBO and held its investment for about six years, it is only natural for the PE firm to seek an exit.

Word has it that Navis approached a local media group to discuss a possible takeover of MBO but the group declined to participate due to the high price Navis wanted.

Navis managing partner Nicholas Bloy, however, tells The Edge that potential buyers have been identified, although he would not divulge the details, citing reasons of confidentiality. “No, but we stopped an earlier exit process as we were considering acquiring another related media business in Malaysia and merging the two, which would or could be an interesting proposition.”

When asked what valuation Navis sought for MBO, Bloy says the cinema business typically sells at between 10 and 15 times Ebitda while listed comparable companies trade at between 15 and 20 times.

At 15 times FY2016 Ebitda, MBO should be valued at RM146 million while at 20 times, it could fetch RM194.8 million.

The cinema business is under pressure from increasing costs and slowing revenue growth. Malaysia’s largest cinema operator, Golden Screen Cinemas, which is owned by PPB Group Bhd, saw a revenue growth of 17.5% in 2015. However, the pace dropped to barely 2.73% in its financial year ended Dec 31, 2017, on revenue of RM481.3 million.

In FY2017, PPB’s film exhibition and distribution business churned a segmental profit before tax (PBT) of RM54.7 million, which was 7.38% lower than in the previous year, although revenue was higher.

The results worsened in the first quarter ended March 31, 2018, when the segment’s PBT dropped 32.9% year on year to RM13.4 million while revenue stagnated at RM124 million.

It is not known how MBO performed in FY2017 as its annual report for the year is not available on SSM’s website. In FY2016, its Ebitda jumped 1.7 times from RM5.63 million while net profit more than doubled to RM5.46 million.

Given the slower growth in ticket sales in the film exhibition and distribution industry, and the single-digit Ebitda margin that MBO earned in 2016, industry players doubt that Navis will find a buyer willing to pay the price it wants for its MBO stake any time soon.

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