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The Covid pandemic has dealt the cinema sector a double whammy. As well as the lockdown forcing the closure of cinemas, Covid is now threatening the very future of the cinema business model, as the response of some film studios to the closures, perhaps predictably, has been to take their productions straight to digital, bypassing the cinema chains like Cineworld Group (LSE:CINE).

Cinemas started out as the only distribution channel for the film industry. They survived the television era by negotiating ‘theatre window’ deals with film studios whereby blockbuster films had to be shown in cinemas for up to 90 days. But the Covid lockdown may have caused a sea change in viewing habits, though it is too early to say to what degree.


Last December, Warner Bros announced that all its 2021 films are to be released in the US on the HBO Max streaming service on the same day as the cinemas. It is therefore not at all clear that cinemas will regain their role as the main distribution channel for films. Will customers, now happily watching films on any one of the burgeoning number of streaming services at home, want to go back to the cinema?

Will cinema goers just stay at home post-pandemic?

Cineworld has got to hope that customers will be missing the unique entertainment value of watching films at a cinema. But the fear has to be that many will just stay at home.

Cineworld Group’s share price of £0.68 certainly looks like good value, trading at some 71% down on the pre-lockdown January 2020 price of £2.21 and the January 2018 price of £5.76. If it is cheap, there must be a reason.

In fact, Cineworld Group is carrying huge debts, incurred to finance the acquisition of the much larger US cinema chain Regal Entertainment Group (NYSE:RGC) in February 2018. The deal means Cineworld is wrestling with “severe financial challenges”, as Cineworld’s chairwoman Alicja Kornasiewicz has admitted, and also explains why last November, Cineworld Group had to refinance its debts, agreeing to a bank covenant waiver, a maturity extension and a three-year loan of $450m. Although Regal brings in a solid revenue stream, Cineworld Group has a debt to equity ratio of some 337%, up from just 56.3% five years ago.

Are Cineworld shares bombed out or waiting to rebound?

So, is this a bombed-out stock waiting to rebound later this year? In April 2020, in full lockdown crisis perhaps, Cineworld’s auditor PwC questioned whether the company could continue as a going concern. But one company director clearly disagreed, having bought £100,000 of shares later that year at £0.23 per share.

Analysts believe Cineworld is unlikely to return to profit for the next three years. However, they are forecasting annual revenue growth of 36%, while earnings are expected to hit 95.8%, well ahead of the 37.4% of its rivals.

Now that the Covid vaccination programmes are finally being rolled out, and a solid supply of films is set once again to come on stream, you would think that the outlook for Cineworld shares has brightened considerably. But the big cloud hanging over Cineworld Group is whether Netflix, Amazon, Disney+ and other streaming services have stolen Cineworld Group’s lunch.

Clearly, the challenge facing cinema chains is how to win back their customer base, something that will require rare imagination and drive. Cineworld Group, more than most, needs to win back its customers to survive.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

James Norris

James Norris

James is a highly experienced writer and editor, gained from more than 20 years in the financial services industry, in particular wealth management and asset management.

He initially worked as a financial journalist for a number of leading media brands, including the FT Group, Financial News, Euromoney and Incisive Media, covering most aspects of the asset management industry. More recently, James switched to work as an in-house content specialist for fund management and wealth management groups, including JP Morgan Asset Management, Quilter Cheviot Investment Management, AXA Investment Managers and Invesco Perpetual.

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Comments

This Post Has 4 Comments

  1. Takeover imminent – Jangho Group have acquired 12.17% of Cineworld and continuing to increase their stake. Also now cash rich following disposal of Healius shares.

  2. Short squeeze about to take place as heavily over shorted and liquidity an issue now Jangho have large stake – expecting a large bounce in the share price.

  3. This has rebound written ALL over it. The notion that people will continue to sit indoors post pandemic is quite frankly fanciful. You can cook amazing food at home but people still go to restaurants. The same applies with streaming which sits alongside cinema as a complimentary platform not a replacement. The experience economy will always exist.

  4. Share price of CINE now sitting in a pre breakout structure on the charts with potential for double or triple bagger – I’m in !!!,

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