Key points
- Cineworld’s customers are flocking back to the big screen
- The company says that it’s now generating positive cash flow
- But the $8bn debt pile remains a big worry for me
- And the threat of a C$1.2bn legal penalty can’t be ignored
Cineworld Group (LSE: CINE) shares surged on Friday after the company said that cinema revenue rose to almost 90% of 2019 levels in December. The Cineworld share price has now risen by almost 25% so far this year.
I’ve been taking a fresh look at the latest news and crunching the numbers. Should I add the shares to my portfolio in hope of a quick double bagger?
People still like the cinema
Covid-19 was a disaster for cinemas. But there’s light at the end of the tunnel. Pandemic predictions that we’d all stay at home and stream movies on television are turning out to be wide of the mark.
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Cineworld said box office and concession revenue rose to 88% of 2019 levels in December. The recovery was strongest in the key US market, where cinema revenue surged to 91% of pre-pandemic levels.
Strong attendance was helped by an impressive slate of new films, including Spider-Man and No Time to Die. I’m confident this recovery will continue. More blockbuster movies are expected over the coming months, including new Batman, Top Gun and Jurassic World titles.
Money worries?
Friday’s trading update was short on financial detail. The company didn’t provide any clues on whether 2021 revenue would hit forecasts. The only thing we know is that Cineworld generated positive cash flow during the final quarter of 2021.
We’ll find out more when Cineworld issues its 2021 results on 17 March. But to be honest, we know 2021 was bad. In my view, what matters most is the outlook for 2022 and 2023.
Broker forecasts suggest that Cineworld’s recovery will accelerate this year. City analysts think that the group could generate around $420m of surplus cash in 2022. That might allow CEO Mooky Greidinger to start repaying some of the group’s $8.4bn net debt.
Earnings are also expected to recover. Broker forecasts suggest earnings of 1.5 cents per share in 2022, rising to 13.1 cents per share in 2023. That prices Cineworld shares on 36 times 2022 forecast earnings, falling to just 4.2 times projected 2023 earnings.
If the recovery goes to plan, I guess Cineworld shares might be cheap at current levels.
My verdict
Cineworld’s share price is still 40% lower than it was one year ago. One cloud hanging over the firm is a recent Canadian court ruling that it must pay rival Cineplex C$1.2bn in damages for a failed acquisition deal.
The UK company is appealing that verdict, but if Cineworld loses I think it will be difficult to find the cash without further fundraising activity.
For me, this situation is too much of a gamble. If everything goes right for Cineworld, I think the shares might double this year.
But there’s a lot that could still go wrong. And with nearly $10bn of potential liabilities, I think the shares could also fall sharply in 2022. I’ll be staying away.
