Key points
- I want to see if cinema revenue has stayed at December levels
- I need to remember Cineworld’s $1bn legal drama
- And I need to see if its debt levels are still sustainable
I’m confident most cinemas will recover from the pandemic and survive the growth of streaming. For this reason, I’m looking at Cineworld Group (LSE: CINE) shares as a potential buy for my portfolio.
For the latest update on the challenges facing this business, I’ll be taking a close look at Cineworld’s 2021 results when they’re published on Thursday. Here are the top three things I’ll be looking for, and what they might mean.
1. Are cinemas back to normal?
Cineworld has already said that revenue in December had reached 88% of pre-pandemic levels.
The Omicron variant may have slowed down this recovery in January and February. But I’ll be hoping that CEO Mooky Greidinger will give a positive update on trading so far this year.
I’ll also be looking at the company’s financial results for 2021. I expect to see further losses. But my hope is that full-year sales will be in line with forecasts of around $1,800m.
If sales fell short, then I suspect Cineworld shares could plunge. Investors may start to doubt whether the group will meet broker forecasts for 2022 sales of $3,700m.
2. $1bn legal drama
The cinema is a great place to watch a courtroom thriller. Unfortunately, Cineworld’s legal dramas are taking place in real life.
Cineworld is currently appealing against a legal judgement that could see the company forced to pay out around $1bn in damages to Canadian cinema group Cineplex. Cineworld agreed to buy Cineplex before the pandemic, but later walked away from the deal.
A ruling on the appeal is probably still some way off. There’s no way to know what will happen at this stage. But my sums suggest that Cineworld would find it very difficult to raise anything like $1bn without wiping out most of its equity value. As a potential shareholder, that’s a serious risk for me.
3. Has borrowing peaked?
In Cineworld’s last set of accounts, the company reported a net debt of $8.4bn at the end of June 2021. This figure included $4.8bn of loans, plus lease liabilities on the group’s cinemas.
It’s the loans that worry me most. Management says it expects to remain within existing lending limits this year. But my analysis suggests it could be a close call.
I’ll be looking to see whether Cineworld’s net debt has risen, stayed steady, or fallen. For me, any increase will be bad news. I can accept a flat result, but my hope is that cash flow from busier cinemas will have allowed a small reduction in borrowing.
Cineworld shares: the final word
I expect Cineworld to report good operational progress, but I think it’s too soon to see much of an improvement in the group’s financial position.
The share price may look cheap at 35p, which is just three times 2019 earnings of 13p per share. But there’s still a risk that Cineworld will have to sell new shares to raise cash. If this happens, 35p might not look so cheap.
Due to the uncertainty of this situation, I won’t be buying Cineworld shares ahead of its results. But I’ll be taking a look at the numbers on Thursday and will report back here with an update.