The Cineworld Group (LSE: CINE) share price has crashed by over 40%, at the time of writing late on Monday. Investors were spooked after the cinema chain announced that it will be temporarily suspending operations across the US and UK.
Covid-19 has provided a difficult backdrop for the hospitality and leisure industry this year. Cinemas in particular are struggling as movie studios remain reluctant to release their pipeline of films. Major markets remain closed and those that are open have struggled to welcome viewers back to cinemas.
Cineworld’s announcement comes just days after the release of the latest James Bond movie was postponed again, until next April. No Time to Die was originally due to be released in April this year but nationwide shutdowns postponed its debut date to November.
The latest postponement highlights the difficulty that cinemas are facing. Without new movies, Cineworld and other cinemas will struggle to attract customers. Without customers, movie studios will remain reluctant to release their latest offerings.
Cineworld may need to wait until movie studios can bring back their pipeline of films to the big screen. Also, the picture may not improve until authorities in Cineworld’s key markets provide updated concrete guidance for cinemas and customers.
Cineworld share price: set to fall even without Covid-19?
The company as an investment has struggled in recent years. The Cineworld share price reached an all-time high in 2017, and has failed to climb higher ever since. One of the biggest reasons for this lacklustre performance seems to be the mountain of debt Cineworld has accrued.
Between 2017 and 2019, although revenues tripled, net debt ballooned 20-fold to almost $8bn. The increase in debt was to enable several acquisitions, aiming to drive future growth.
Without Covid-19, the group could potentially have increased revenues enough to be able to reduce this level of debt. However, Covid-related shutdowns earlier this year brought revenues to a standstill. Despite attempting to reopen over the summer and lure customers through its doors, it just has not been enough.
So what now for the Cineworld share price?
Given that revenues have dried up, I think there is a good chance that Cineworld may need to refinance its debt. It said in a statement: “Cineworld is assessing several sources of additional liquidity and all liquidity raising options are being considered”.
Equity shareholders may have their holdings diluted if new equity is required. Either way, it doesn’t look great for shareholders, in my opinion.
After a one-day decline of nearly 40%, a short-term bounce is possible. Any sign of a vaccine or any possibility that public confidence is returning could support the share price in the short term. However, both currently seem a long way off. With no clear visibility of revenues and a burgeoning debt pile, I would steer clear. If I already held the shares, I would sell them, despite taking a loss. There are several other less risky options in the hospitality and leisure sector that I’d consider instead.
