The FTSE 250‘s Cineworld (LSE: CINE) is the second-largest cinema chain in the world as measured by the number of screens it has.
Right now, every one of its cinemas in the primary UK and US markets is closed because of the pandemic. So, can the business survive the crisis without that revenue?
Why I think the Cineworld business can survive
I reckon it can. In an update released last November, the company told us it had secured “significant” additional liquidity. The measures include the arrangement of a new debt facility worth $450m and the issue of equity warrants. However, one of the biggest long-term risks for shareholders is the company’s growing pile of debt.
But the company has agreed with its lenders the waiver of bank covenants until June 2022. And that strikes me as enough time for the business to emerge from the Covid crisis and resume trading again. On top of that, the directors have negotiated the extension of the maturity of Cineworld’s $111m incremental revolving credit facility until May 2024. So it seems the banks are supporting the company through the crisis.
In a final neat move, the firm “accelerated” the closure of its tax year to bring forward to early 2021 an expected tax refund worth $200m. It reckons the measures will provide the necessary financial and operational flexibility to enable the survival of the business.
On top of those financial arrangements, Cineworld has been making operational changes to bear down on costs while the estate is closed. For example, the directors have stopped projects involving capital expenditure. And the company has been negotiating with its key landlords to defer rents and arrange new lease agreements in some cases.
Cineworld needs to survive until lockdown restrictions ease so that studios can deliver from their pipelines of major film releases. The directors reckon customers may be reluctant to return to the big screen venues after the pandemic has subsided. But the draw of big movies could encourage them back.Â
High stakes
However, the stakes are high. Cineworld is still burning around $60m each month while its cinemas are closed. And that’s even with all these measures and cost savings in place. So an obvious risk for shareholders now is the possibility of a lengthy extension to the Covid crisis and the lockdowns.
Nevertheless, Cineworld’s business seems like an obvious candidate for a snap-back. It’s easy to imagine revenues and earnings shooting up when cinemas do reopen, perhaps driven by pent-up customer demand.
And I’d consider a strategy of buying some of the shares when the news flow is at its worst and the stock is on the floor. However, the moment has passed. Judging by the long stream of notifications of major holdings on the company’s RNS feed, the stock has been well traded over the past few months. And near 76p, the share price is well up from its lows of last year below 25p.
As usual, investors seem to be anticipating a business recovery before the fact. And I think that increases the risks of an investment in the shares today, so I’m avoiding Cineworld now.