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Cineworld shares: cinemas are reopening but has the damage been done?

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Cineworld shares (LSE:CINE) saw a short term boost following its latest set of results, but they still have a long way to go to get back to where they were earlier this year.

Cineworld stock was trading at 64.96p at time of writing, but that was still well down on where the shares were in March, when they were trading at 122p. While many investors had anticipated the cinema group looked like a huge value opportunity, some are now more sceptical about whether cinema going will ever return in its pre-2020 form.

While the company is still in the top 20 most popular stock investments for UK investors (according to broker ETX Capital), it is now ranked at number 20 and we doubt it will rank for much longer.

Cineworld reported that the industry did look as if it was returning to some level of normality. First half pre-tax losses had narrowed to £576.4m, which is down from £1.64bn last year, but is still a staggering number. The company is also considering tapping US markets, perhaps on a quest for some of the AMC Entertainment gold dust.

Cineworld is hoping for a strong recovery

Cineworld’s results reflect a tough period of closures in both the US and UK. With cinemas now open, limited capacity constraints and a strong content pipeline, Cineworld is hoping for a strong recovery in Q4.

However, some estimates suggest that box office revenues will be 10% lower post-Covid permanently as customers have grown accustomed to watching films at home, studios have shortened the theatrical window and exhibitors have permanently closed the curtains on unprofitable cinemas.

“You may have 20-30% of cinemas making 80% of the EBITDA, so Cineworld can afford to close underperforming cinemas depending on the rental contract,” observed Harry Barnick, senior analysts with Third Bridge. “In total, Cineworld may end up closing up to 5% of its estate.”

Cineworld is dependent on blockbuster films enticing customers back to the cinema. It must also pivot to new revenue streams: less Hollywood, more arthouse and alternative content. But is this going to be enough?

“We are now entering the unknown…”

“In an already difficult year, studios have dealt a blow to the exhibitors via theatrical window cuts,” says Barnick. “We are now entering the unknown: will customers pay to see a film in the cinema or wait 45 days for it to be released on PVOD? Cineworld will hope for the former and worry about the latter.”

Cineworld’s leverage has also skyrocketed during Covid and its debt burden will be an additional challenge through the recovery period.

Shares are up over 26% on a 12 month basis but that March number now looks like a summit that the stock will find hard to beat.

As Third Bridge points out, there are growing concerns about just how many people will go the cinema this winter, whether pay to view from the comfort of your own living room will be the new normal,  and whether Cineworld can really justify a share price that is much higher than where it is already?

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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