Should Cineworld (LSE: CINE) shareholders take comfort from last week’s half-year results? The market didn’t seem to think so. Cineworld’s share price plunged 15% on the day and the stock has now fallen by 80% so far this year.
Having looked through the latest numbers from the cinema group, I can see risks and opportunities. Although I think this is a good business, my big worry is the group’s debt situation. This could still cause problems for shareholders.
A quarter of cinemas still closed
One surprise to me was that more than a quarter of Cineworld’s 778 sites are still closed. This is mainly down to restrictions in California and New York, where 200 of the group’s cinemas are located. This appears to be hitting the group’s financial performance hard. Management says revenue was “severely impacted by these cinema closures.”
Sales and profits for the half year are largely meaningless, in my view, as the numbers include a long period of closure. But, for the record, Cineworld’s revenue fell by 67% to $712m during the six months to 30 June. This resulted in a pre-tax loss of $1,645m.
Performance will hopefully improve now that the majority of cinemas are reopened. Management says they’ve been “encouraged by our recent performance” in reopened markets. Films such as Tenet are said to have performed well. Several more blockbusters are lined up for the rest of the year, including the new James Bond film No Time to Die.
Debt worries
Cinemas are under pressure from streaming services such as Netflix, which are willing to pay for early access to new films. Personally, I don’t think the appeal of going to the cinema will change. I reckon cinemas will survive.
My concern is that the business could run out of cash before business returns to normal. If this happens, Cineworld’s share price could collapse.
The group’s net debt has risen from $7.7bn at the end of 2019 to $8.2bn at the end of June. Excluding lease liabilities, bank debt has risen from $3.6bn to $4.2bn. Although the company thinks it will have enough cash to operate until at least the end of June 2021, management expects the group to breach its lending conditions. These limit the ratio of net debt to adjusted profits.
Cineworld is in negotiation with its lenders to waive these conditions. But a deal may come with strings attached. One possibility I can see is that the firm will have to raise some extra cash by selling new shares. In the current market, this could be heavily dilutive for existing shareholders.
Cineworld share price: not a happy ending
I believe Cineworld is a decent enough business that should survive. But the group has loaded up with debt in recent years, mainly due to acquisitions. Some of this debt could have been repaid by now if the company hadn’t chosen to pay generous dividends at the same time.
Cineworld shares looked risky to me back then and things have only got worse. I think this movie is going to end with existing shareholders getting heavily diluted in a big equity raise.
I’d stay well away — I think there’s a good chance that Cineworld’s share price will keep falling.