Choosing UK shares to buy over the past few months has not been easy with so much uncertainty surrounding the economy. Brexit is yet again rearing its ugly head, making forecasting even harder. Meanwhile, rising Covid-19 cases along with the threat of local lockdowns are hampering efforts to return to normal. Cineworld (LSE:CINE) came close to being one of the biggest Covid-19 casualties, but it seems to be hanging on by the skin of its teeth. So, is it all over for the world’s second-largest cinema chain or is the Cineworld share price one to watch?
Footfall returning
The US is responsible for 73% of Cineworld’s revenues, and about 70% of cinemas there have reopened. During this past weekend, new film Tenet generated $20m at the US box office. It needs to generate $500m to break even, so it’s not yet clear if this is good revenue given the circumstances. It could be an encouraging sign, as more Americans attended the cinema this weekend, than in the past almost six-month period. The chain has several more high-profile premieres lined up, which it hopes will increase footfall.
UK cinemas have also been gradually reopening since July, and the UK seems to have a slightly better handle on the virus than the US. However, as the UK and Ireland only contribute 15% to Cineworld’s revenues this is not terribly reassuring.
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Takeover rumours boost Cineworld’s share price
A month ago, a US judge ended the Paramount Decrees, a set of antitrust rules from the 1940s that banned film studios from owning theatres. This set the rumour mill in motion that perhaps a Hollywood studio would be in the perfect position to take over Cineworld’s 500 Regal sites in the US.
Rumours of another private takeover followed, when Chinese investor Liu Zaiwang bought a 5% stake. This caused shareholders to speculate whether his Jangho Group would be in the running to buy out the struggling chain. These rumours caused the Cineworld share price to spike, but it was short-lived. Now, neither scenario seems likely as it’s so difficult to predict income and cash flow, given the pandemic, and Jangho has since reduced its holding. Today Cineworld remains one of the top 5 most shorted UK-listed companies, which is another big red flag that this share can expect further price volatility.
The future of cinema
On a slightly more positive note, Global City Theatres, a 20% shareholder in the group, agreed to refinancing and confirmed it remains a long-term holder. The Cineworld share price is down 73% in the past year, its price-to-earnings ratio is 6, and earnings per share are less than 10p.
While I don’t like the outlook for cinema, I’m not convinced it is dead. The landscape began changing before the pandemic, with the rise of streaming services. This has since intensified and people seem happy to watch movies at home, rather than spend more and risk their health by going to a cinema.
As a long-term value investor, I seek growth potential when choosing UK shares to buy. I also look for a dividend, so I can benefit from compound interest. As Cineworld doesn’t offer a dividend and I don’t see room for growth, I’m not interested. I think the Cineworld share price will continue to be volatile until a vaccine is in circulation. I think the FTSE 250 cinema chain remains a risky buy.
