2019 has proved to be a lead balloon Cineworld Group (LSE: CINE) and its shareholders, the company’s share price dipping almost 20% since the start of January as box office takings have disappointed.
I’m not panicking though. Tough trading conditions have been caused by an unfavourable film slate versus 2018, so it’s no wonder that revenues have dipped. In truth, the global box office remains extremely strong, underpinned by the steady stream of sequels, reboots and popcorn movies from the likes of Disney and Marvel.
And so this disappointing calendar year is likely to prove a blip, in my opinion. I consider Cineworld to still be a great long-term play on our love of the movies, and particularly as it continues to build its global network of cinemas.
A Christmas gift
Following its move into the North American marketplace almost two years ago with the game-changing purchase of Regal Entertainment Group, the FTSE 250 firm has got its chequebook out again in end-of-year business to snap up Canada’s biggest movie theatre operator Cineplex for US$2.1bn.
Cineworld’s shares tanked when news of the deal hit the wires on Monday morning, investors fearing the growing weight of debt on the balance sheet following that US$3.6bn takeover of Regal. The latest deal will put another US$2.3bn of debt on the pile (which comprises the acquisition itself, related expenses and the refinancing of Cineplex debt).
But market-makers have greeted the deal, possibly agreeing with the board that it could prove “strongly earnings and cash flow accretive.” Cineplex has a three-quarters share of the Canadian marketplace, one in which box office revenues and ticket prices have risen 1.9% and 3.5% in the four years to 2018. Moreover, Cineworld believes that the enlarged group could realise colossal cost savings over the next couple of years, of US$120m by the end of next year and US$130m by the close of 2021.
Long-term gain but short-term pain
Those high debt levels can’t be ignored, and they threaten to linger on the balance sheet for a long period. But in a global market which is (by and large) only going from strength to strength, and the business throwing up boatloads of cash, I believe that the possible risks are far outweighed by potential rewards.
Indeed, many are predicting that the global cinema market will stabilise in 2020 before powering to new records in 2021, fuelled by a ramping-up in superhero movies from DC and Marvel and a packed slate of other much-loved franchises (like the new Matrix movie, John Wick, Jurassic World, Avatar, and Fantastic Beasts 3 to name just a handful). And through its near-1,000-strong global cinema estate, Cineworld is well placed to capitalise on this fertile environment.
And at current prices the screen icon trades on a rock-bottom forward P/E ratio of 9.6 times and carries a monster 6.1% dividend yield. Cineworld’s a share I bought for my Stocks & Shares ISA and I think anyone should follow my lead and enjoy a little movie magic.