Cineworld Group (LSE: CINE) shares have risen by more than 20% over the last month. I’ve written before about Cineworld’s problems, so I was interested to see the stock performing so well. With the vaccine rollout accelerating, should I be buying this stock as a recovery play?
When I see a stock move sharply higher or lower, the first thing I do is to check whether the company has issued any recent news. It turns out there are a couple of developments I’d want to consider before buying Cineworld shares.
Takeover bid on the cards?
The first thing is that a Chinese property group has been building a large stake in Cineworld. The latest statement from Jangho Group shows the Beijing-based firm now owns 13.3% of Cineworld stock. That makes Jangho the cinema chain’s second-largest shareholder, after CEO Mooky Greidinger and his brother Israel, who control 20%.
Jangho has been buying CINE shares since August last year, according to stock market disclosures. Is the Chinese group planning a bid? I’ve no idea. But the Greidingers have built Cineworld into the world’s second-largest cinema chain. I’d expect them to fight any takeover bid, perhaps even taking the company private themselves.
The Greidingers also have another incentive to retain control of the company. Cineworld shareholders have just approved a share option scheme that could pay each brother up to £65m in shares in three years’ time. I’m not too keen on this, as it seems excessive to me. But it’s a done deal.
What else is new?
Cineworld shares have been heavily shorted by hedge funds betting the stock will fall. So I suspect the shares’ recent rise may be linked to events in the US, where rival group AMC Entertainment has benefited from private investors’ efforts to boost its share price.
Even so, Cineworld shares are still trading more than 50% lower than a year ago. If I bought the stock and it returned to the level seen in February 2020, I’d double my money.
However, when I’m buying shares I try not to get distracted by potential profit. I think it’s even more important to consider what could go wrong.
My main concern with Cineworld is the group’s net debt, which was reported at $8.2bn at the end of June 2020. My analysis suggests the current figure is probably higher. I think the firm could struggle to pay down these borrowings, even when business returns to normal. I believe the Greidingers may be forced to raise money by selling new shares, diluting existing shareholders.
Cineworld shares: my decision
The latest broker forecasts suggest Cineworld will probably report a loss in 2021, before returning to profitability in 2022.
Personally, I’m treating these forecasts with caution. Even when cinemas in the UK and US are able to reopen, I guess they’ll have restricted capacity. I can’t predict when they’ll be able to operate at full capacity again.
Should I buy Cineworld shares? For me, this is an easy decision. The company’s high debt levels rule out this stock as a potential investment for me. I won’t be buying.
