A potential curtain call for Cineworld’s share price

Cineworld’s [CINE] share price has been a flop so far this year. While the stock started 2020 at 189.06p, it fell to a record low of 18.45p on 17 March as global lockdowns began to be enforced.  

After hitting an all-time low, Cineworld’s share price clawed back some of its losses, rallying a massive 439% to close at 99.44p on 8 June. The recovery was driven by news that cinemas would be reopening their doors across the UK in late July.

The reprieve was short-lived, however, as an increasing number of blockbuster film delays put off moviegoers, sending Cineworld’s share price down 36% to 38p by the end of July.

The release of two blockbusters — Warner Bros’ Tenet and Disney’s Mulan — in late August and September received an underwhelming reception, leading Cineworld’s share price to decline 31% during the month to 42.92p on 21 September.   

Given the weakened film line up, will the company’s earnings report — expected on 24 September — help Cineworld’s share price?

Heavy debt

Even before the coronavirus pandemic, Cineworld’s share price had begun to lose its shine despite being the second-largest cinema chain in the world.

For the year ended 31 December, Cineworld had net debts of $3.5bn. This concerned investors given that the company was considering acquiring Canadian cinema chain Cineplex with a $2bn loan. Cineworld’s share price ended 2019 down 5.7%.

Rising debt fears grew in March, when Cineworld warned that if it lost up to three months of revenue due to cinema closures, it could be at risk of breaching its debt covenants.

It came as no surprise when Cineworld outlined its coronavirus plan in its 2019 annual results, released in April. These included a slew of capital-raising measures including a salary deferral for executives and a dividend cut.

The group missed analysts’ expectations after announcing a 6% year-over-year fall in revenue to $4.3bn and a 36% year-over-year decline in profits to $180m.

The weakened balance sheet, coupled with the fact that it had to close all 787 of its cinemas across 10 countries as a result of COVID-19, left Cineworld with no option but to take aggressive cash preservation measures.

While most investors have become accustomed to companies suspending dividends this year — the movie theatre operator has said it won’t pay any in 2020 — some analysts believe Cineworld’s share price has been left fragile.

Roland Head wrote in The Motley Fool that the company’s current debt levels “are unlikely to be sustainable without some kind of refinancing”.

A bargain buy?

Head advises avoiding the stock, but also noted that Cineworld’s share price looks cheap at the moment.

As of 21 September’s close, the stock trades 81.8% off its 52-week high of 235.20p, giving it a trailing P/E of 4.38.

Although the outlook for cinema, and Cineworld’s share price, doesn’t look great, the industry is not expected to simply disappear.

“It is worth noting that predictions for the death of cinema have been made before, notably in the 1950s and 1980s when the advent of TV and home video respectively led to declines in admissions, but the industry ultimately recovered. Cineworld and its investors will be hoping for a repeat this time,” Russ Mould, investment director at AJ Bell, wrote in a note to clients in April, according to Morningstar.

“It is worth noting that predictions for the death of cinema have been made before, notably in the 1950s and 1980s when the advent of TV and home video respectively led to declines in admissions, but the industry ultimately recovered. Cineworld and its investors will be hoping for a repeat this time” - Russ Mould, investment director at AJ Bell

According to analysts polled by Simply Wall Street, the group is expected to post revenues of $2.38bn for 2020.

Meanwhile, Peel Hunt is forecasting a more downbeat estimate of between $1.1bn and $318m, according to ShareCast.    

The firm expects Cineworld will trade at worst on a cash-neutral basis from September and end the year with $240m in cash. It rates the stock a Buy.

The consensus among 13 Wall Street analysts polled by MarketBeat also rate the stock a Buy and provide a price target of 245p.

Ultimately, just how bad Cineworld’s financial state really is will be of crucial interest to investors trying to determine whether to make a long-term bet on its recovery.

Cineworld share price vitals, Yahoo Finance. 22 September 2020