Is it Popcorn time for Cineworld?
“…Cineworld have reopened all of their theatres in the UK and the US over the last few weeks, but can the shares recover after losing over 80% of their value since the start of 2020?…”
Cineworld is a global movie theatre operator, known for being the world’s second-largest theatre chain. Whilst previously that would be something to boast about, in the current environment that becomes something of a liability. Just before the “crisis”, Cineworld spearheaded acquisitions with an aim to becoming the largest movie theatre operator in the world. This strategy has since come back to bite the company with revenues sinking with the onset of COVID-19.
At the start of the crisis, the Cineworld share price was a falling knife. Shares fell to around 18p a share as the company warned that they may not be able to stay in business due to the Coronavirus. The company then issued a ‘going concern’ statement that followed back in early March. Shares went down as low as 18p and that implied that Cineworld was on the brink of collapse and that initial fall, like many other companies, is now clearly seen to be an overreaction. Since then shares have pushed higher, touching nearly £1 a back in late May but more recently they have sunk back to around the 50p level. Cineworld is by no means out of the woods yet and with uncertainty surrounding many companies, their position is no different and still remains very uncertain. But is now the time to have a closer look at the shares?
Debt
The biggest issue confronting those who are weighing up entering Cineworld is the large debt pile the company currently has. High levels of debt are generally frowned upon as they can weigh on a company’s performance and prevent strong cash returns to shareholders. This is particularly true in todays new world where breaches of debt covenants become very serious concerns. This debt problem of course applies to Cineworld, and while lenders are being lenient currently (having waived the June covenant test date) they may not continue to be so lenient going forward. It is a very serious issue.
Opportunity knocks?
Cineworld is one of many stocks currently trading at a massive discount to their previous highs this year. Could this company be one of the biggest bargains of the recent stock market sell off? The Company has endured a torrid few months, but analysts at Peel Hunt believe the future may be looking up. Peel Hunt reiterated its view that demand for cinemas should bounce back now that social distancing rules have been eased. The top London Broker said that Cineworld presented “an attractive buying opportunity” for investors with appetite for risk and slaps a £1.80 price target on the Company.
A key assumption is that revenue will be 50% of pre-Covid-19 levels from September. However, having estimated cash burn (in the absence of published guidance from the company) Peel believe that the business will trade at worst on a cash neutral basis from September onwards and end the year with around $240m of cash and undrawn facilities.
Cineworld stock is likely to keep rising as more theatres reopen and moviegoers flock to its cinemas to view many of the movie classics that are currently playing.
Cinemas need big movies. According to data from Box Office Mojo, each year’s top 20 releases provide more than half the box office takings. Newness also matters: the first three weeks of a release provide about 80 per cent of a movie’s total box office revenue, whether it is a hit or a flop. With Social distancing allowing film producers to get back to what they do best, as in making films, is Cineworld a decent bet and a share to stick away in the bottom draw?
….At £5 a ticket, time to see what your missing?
The author was compensated for this article but does not hold shares in the company.
