Cineworld (LSE: CINE) is down close to 70% over the past 12 months. Anticipation of 2021 results released on 17 March gave the cinema chain operator a boost. But though the Cineworld share price rose on results that morning, it turned and ended the day with a 5% loss.
Cinema admissions rose 75% from the previous year, to 95.3 million. That’s still a long way from pre-pandemic crowd sizes, but definitely moving in the right direction. My Motley Fool colleague Roland Head took a close look at the figures on the day, and I largely agree with his take.
Looking at the business itself, Cineworld suffered from closures in the first half of the year. But the company saw strong trading in the fourth quarter, which shows demand is still there. Of its outlook, the company spoke of “gradual recovery of admissions and demand since re-opening, supported by strong retail sales and premium formats.”
Crowds coming back
We still like going to the movies. I expect to see more and more seats filled in the coming months as people react to being able to go out again just like in the old days (and I expect to be in some of them). This is a company I would like to have in my portfolio, but only if the Cineworld share price is right.
Revenue in 2021 more than doubled from 2020. And the company reported a positive adjusted EBITDA after payment of lease liabilities. It was only $54.4m, but a lot better than the $314m loss the previous year. Adjusted pre-tax loss was still heavily negative mind, at $823m.Â
Cineworld share price recovery
I don’t expect upwards momentum returning to the Cineworld share price any time soon. That’s for two key reasons, both of which Roland picked up on too. The first is contained in the short statement that the “Ontario Superior Court awarded C$1.23 billion in damages to Cineplex.” Eek! That’s almost US$1bn.
Cineworld “strongly disagrees with this judgment and has appealed the decision“. But if it loses and has to pay, well, it doesn’t look like it will be able to.
My other big concern is debt. It’s the main thing that has held me back from investing in a number of post-Covid recovery stocks. The company raised new liquidity of $425m during the year, and that was boosted by a $203m tax refund.
Big debt
But Cineworld ended the year with net debt (excluding lease liabilities) of $4.84bn. That’s £3.68bn, against a market-cap of just £521m. To buy the whole company and pay off its debts, you’d have to cough up around £4.2bn. And you might still face that $1bn damages thing.
So what’s the upside? I think today’s super low Cineworld share price is based on a huge amount of pessimism. And it may well be enough to account for the present risk, and then some undervaluation.
Should Cineworld win its court appeal, I reckon the share price could soar. And as soon as we see bottom-line profit again, I expect another boost. But for now, there’s too much risk for me. Cineworld is on the back burner, with a view to maybe buying in better times.