Last year was a terrible one for shareholders in Cineworld (LSE: CINE). Its shares lost around 88% of their value in 2022.
2023 has started more strongly, with the shares moving up by 10% since the start of January. Could this be a sign they are on track to have a strong year – and might that be a reason for me to invest now?
Long-term outlook
I think last year’s performance and also January’s price improvement can be pinned on the same causes, even though the moves were in different directions.
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Cineworld is a basket case of a business due to its huge debt pile. Many investors abandoned hope in the company last year, expecting that shareholders would be wiped out, or almost wiped out, by creditors if the company managed to avoid bankruptcy. There has not been a dramatic turnaround in the underlying business.
But the company has been working on improving its finances, including trying to sell assets. If that could release enough value, it may allow the company breathing space for creditor negotiations and a chance to rebuild the business. I think that hope is what has driven Cineworld shares upwards this month.
Difficult situation
Such an asset sale could yet happen. It is also possible that creditors could end up renegotiating their debt so that shareholders are not completely wiped out. But as I expect them to focus on their own interests, I see that as a somewhat unlikely scenario.
Indeed, the company this month reiterated the possibility of “a very significant dilution of existing equity interests in Cineworld… there is no guarantee of any recovery for holders of Cineworld’s existing equity interests”.
When a company repeatedly warns its own shareholders that they could be wiped out, I take that seriously. On its own, it is a big enough red flag of the risks involved to stop me buying Cineworld shares at this point.
Recovery prospects
As they trade for just a few pennies each, the shares can move around a lot in percentage terms, even with a move of just a fraction of a penny.
I see the recent rally as being driven more by optimism than hard-headed analysis. If there are enough optimists in the market, that rally could continue. That might boost Cineworld shares further during 2023, perhaps dramatically.
Taking a step back from the short-term share price action, as a long-term investor I continue to avoid Cineworld like the plague. It is trying to sell its assets. Plus net debt at the end of June was a colossal $8.8bn, and recovery in its core business is incomplete. Revenues in the first half of last year remained 30% lower than the pre-pandemic equivalent in 2019.
That does at least show that the core business is on the road to recovery in terms of revenues, albeit gradually. I think the company’s massive estate and strong market position could help attract more customers back to the silver screen. But its finances are simply horrible. I see a real risk that the shares will end up worthless.
