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Why Saudi Arabia is Worth at Least $8 a Share for iPic Entertainment
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Why Saudi Arabia is Worth at Least $8 a Share for iPic Entertainment

iPic Entertainment just got a golden ticket into Saudi Arabia. How much should investors be willing to pay for it?

The luxury theater-and-restaurant operator announced a partnership with a local firm to develop locations in Saudi Arabia, which will soon allow exhibitors to build cinemas after a three-decade hiatus. As RegAResearch flagged in this report last month, the possibility of an international deal could lead to a windfall of profits.

Saudi Arabia could not be riper for the introduction of movie theaters as a source of entertainment. Two-thirds of the population is under 30 years old, the country’s oil reserves make it one of the richest in the world, and the alcohol ban means people don’t spend on drinks at bars and restaurants.  

Indeed, the Saudi Arabia opportunity is gigantic – even in the context of iPic’s domestic business. The company estimates it could build as many as 30 locations in the next decade, compared with the total of 15 it currently operates in the U.S.

How much revenue could that mean? Assuming each theater has eight screens and they generate $1.7 million per year, the same as iPic’s newest “third generation” models, annual Saudi sales could reach about $400 million. That figure also seems reasonable given that Saudi Arabia has about one-tenth the population of the U.S., which generates $11 billion in movie-theater revenue annually.

It’s also possible to forecast how much of those sales will flow to profits. Other U.S. companies such as restaurant operator Fogo De Chao have made joint-venture agreements with local Middle Eastern companies including a license fee that’s a percentage of gross revenue. Such license fees tend to range from 5{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} to 7{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208}.

For simplicity, we can focus on the value of the license fee and set aside the ownership of the JV itself. Assume iPic will collect 5{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} of future revenue from its Saudi theaters. Tax that revenue at 20{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208}, put it on a multiple of 12, and the income is worth about $200 million, or $17 a share. To adjust for time and uncertainty, we might divide that benefit in half, making the Saudi deal worth about $8.50 per share.

Of course, iPic as yet only has a memorandum of understanding. There’s a lot of work to do before it can secure the necessary government licenses to open a theater. And there will be plenty of competition from other exhibitors like AMC Entertainment, which announced a similar partnership with the Saudi sovereign wealth fund late last year.

But iPic is on good footing. Its partner, BAS Global Investments, already works with major U.S. companies including chemical giant Air Products and Medline, the largest private medical products firm in America. BAS no doubt has the local experience and connections to get business done in the tightly-controlled Kingdom.

And iPic’s product offering will likely appeal to well-heeled Saudis who have an obvious penchant for luxury. The in-theater dining and large pod seating, similar to first-class experiences featured on some Middle Eastern airlines, should outsell the mass-market models of AMC and others.

Success may beget success. Neighboring Middle Eastern countries will take notice of iPic’s entry to Saudi Arabia and could soon negotiate deals of their own. The same may go in other wealthy countries in Asia where governments keep a tight grip, such as Singapore.

Importantly, an asset-light JV model in an overseas market like Saudi Arabia could quickly change iPic’s margin profile, accelerating its path to profitability. With the stock trading around two times sales and the fresh Saudi news, investors should snap up their iPic tickets right away.

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