Cineworld (LSE:CINE) shares currently trade at 33p. The penny stock last touched 100p in April of last year, meaning the share price has fallen 68% over a one-year period. Before the pandemic kicked in, the Cineworld share price was trading above 200p in late 2019, underlining the extent of the fall. So could it possibly get back to three figures at some point this year?
Why 100p could be achievable
In the 2021 full-year results, there were some reasons to be positive about what the company could achieve without being hampered by Covid-19 restrictions. For example, despite cinemas at some locations being shut from January to April/June last year, revenue for the year was significantly higher than 2020. It jumped 111.8% to $1.8bn.
In 2022, operating restrictions shouldn’t be a problem for any part of the financial year. So if Cineworld benefits from those additional four-to-six months of capacity, along with higher demand for the rest of the year, revenue could double again for 2022.
This should help to push adjusted EBITDA to around $900m, meaning that even after high financing costs, a profit before tax could be on the cards.
Adjusted EBITDA in 2019 was just over $1bn, when the share price was comfortably above 100p. Therefore, it’s not unrealistic to think that the Cineworld share price could get back to that level if comparable financial results were seen.
Concerns for the Cineworld share price
On the other hand, 100p is a long way from the current share price. I think one of the ongoing concerns is its high debt levels that in turn lead to high ongoing financing costs.
For example, even though adjusted EBITDA for 2021 was $454m, it had finance expenses of $899.2m. This was by far the largest contributor that pulled the company to its loss last year.
Non-current liabilities stands at over $9bn, even higher than the 2020 figure of $8.7bn! This figure is going in the wrong direction. When I try to pin a fair value on the Cineworld share price, I have to take into account the liabilities as well as the assets. With that in mind, I can’t see the shares reaching 100p any time soon unless these liabilities start to be reduced.
Another reason for concern is that there’s a strong argument that customer behaviour has fundamentally changed since the start of the pandemic. The concept of sitting in an enclosed space with hundreds of strangers is something that hygiene-conscious people might not want any more. Couple this with the rise of streaming services such as Netflix and Amazon Prime, and Cineworld might never reach the capacity levels seen before the pandemic.
My verdict on Cineworld
Although the Cineworld share price had been at 100p only a year ago, I think that level could remain an ever more distant memory for a long time to come. The recovery in revenue should aid the potential for a share price bounce. Yet the heavy financing costs and change in consumer sentiment lead me to conclude that 100p is too great a leap to be seen soon. I won’t be investing at the moment.
