When I last wrote about FTSE 250 cinema group Cineworld (LSE: CINE), the shares were close to a 12-month high of 125p. Since then, Cineworld’s share price has fallen by almost 50%.
At around 65p, the shares are now just 10% higher than they were a year ago. With cinemas open for business again, I’ve been taking a fresh look at this situation. Is Cineworld now a turnaround buy?
Here’s the good news
During the pandemic, doomsters predicted that no-one would ever go to the cinema again. Instead, we’d all stay at home on our lonesome, watching Netflix on TV. I didn’t think that was likely — but was I right?
When Cineworld reopened its UK cinemas in May, the company said that attendance had gone “beyond our expectations,” including “strong concession income.”
For a broader and more recent view, I’ve been looking at the latest box office stats from the UK Cinema Association. According to this trade group, the top 10 films shown in the UK generated £61m of box office revenue in June. By comparison, the average monthly box office in 2019 was £104m.
Based on these figures, I’d suggest that a recovery is already well under way. I certainly don’t see any reason to predict the end of the cinema. I reckon Cineworld’s next trading update should contain some encouraging news on customer numbers.
Is the $8bn debt mountain still a risk?
I’ve talked a lot over the last year about the risks I see for shareholders as a result of Cineworld’s $8.3bn net debt. An emergency fundraising would almost certainly have caused Cineworld’s share price to crash.
I’m still not comfortable with the group’s debt levels, but I think the risks for shareholders are much lower than they were. Unless cinemas are forced to close again, I think Cineworld will probably manage to avoid any major refinancing.
It’s worth remembering that CEO and deputy CEO Mooky and Israel Greidinger also have a powerful reason to avoid issuing new shares. They aren’t just hired managers — they own about 20% of Cineworld. Raising funds by selling new shares would mean having to put in fresh cash themselves or see their holding diluted. I reckon they’ll try hard to avoid this.
Cineworld share price: a bargain buy?
We don’t yet have any figure on Cineworld’s trading since its UK and US cinemas reopened. The key question for me is whether the company is getting enough customers to cover its cash operating costs.
Industry analysts seem to be cautiously optimistic. The latest broker forecasts suggest that Cineworld will see a cash outflow of £135m this year but will generate about £440m of surplus cash in 2022.
Based on these numbers, I think Cineworld’s share price is getting close to a level where it could offer good value. Considerable risks remain — we aren’t out of the pandemic yet and further restrictions are still possible. But I reckon Cineworld’s movie-mad bosses have probably pulled off a difficult survival trick.
However, I have to admit I still won’t be buying Cineworld shares. Even if they start to fall next year, the group’s debt level will remain higher than I like to see. For me, CINE stock is just a little too risky.