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Summary
- Cineworld has been seeing a good rise in its share price since 11 August led by some rumours of takeover
- Rise in share price could also be attributed to the UK government’s decision to ease in the lockdown
- The company is looking for additional borrowings from various institutions and its debt is looking more arduous than ever
Cineworld Plc- (LON:CINE) saw a sharp surge of 50% in its share price during the 7 – 15 August after speculations doing round suggested that the company may be delisted and might be taken private by its owners.
The rise in cinema group’s share price came in the backdrop of rumours which suggested that the cinema operator will be taken over after a US judge concluded the ‘Paramount Decrees’ – an antitrust regulation incepted during the 1940s that barred movie studios from possessing theatres.
Amid this development, investors got a positive vibe about the company’s stock leading to the belief that the cinema chain’s American business Regal could be taken over by some of the renowned film studios in Hollywood, given that the antitrust regulations have been annulled.
In the following days, the world’s second-largest cinema chain, which runs 787 theatres in ten nations, witnessed a continuous rise in its share price.
Surge in stock price
The sudden jump in the Cineworld’s share price could also be attributed to the UK government’s decision to ease in the lockdown which began from 15 August. Some of the cinema halls in the country reopened on 21 August. Earlier, the UK government had allowed cinemas to resume their operations from 4 July, and with that, Cineworld reshuffled its opening dates many times.
Cineworld, which is the only cinema stock listed on the London Stock Exchange, ensured to put precautionary measures in place in the wake of the coronavirus outbreak. The cinema operator followed social distancing norm strictly which included booking tickets only via digital mode, maintaining distance in seating arrangements and playing movie shows at irregular timings.
Tracking from YTD 2020
The company witnessed a lukewarm performance in its stock price since the beginning of the year. The cinema chain, which has been facing a rising debt, made several changes in its capital structure to keep the flow of the liquidity uninterrupted in 2019.
As the COVID-19 pandemic hit the cinema halls and movie business to a large extent, the year 2020 is seen as a disappointment for Cineworld’s from its business point of view. The company is likely to witness a substantial loss. Also, it’s management, in the first week of April, announced that the firm had cancelled this year’s dividend payments.
Also Read: The UK Cinema Industry to Test the Moviegoers' Post Lockdown Appetite with “Tenet”
Though the company’s share price is at low level compared to its YTD high on 2, January 2020, however, one has to be cautious about the flipside trend and risks, as many aspects can influence the future of the stock. It is important to note that the company’s stock plunged massively from its high, even, before the COVID-19 pandemic had hit the world economy.
This could be seen as a warning sign about the volatility in the company’s stock chart. Moreover, the London-headquartered company is battling with mounting debt.
Future looks uncertain
The Cineworld group announced its final results for the year ended 31 December 2019, the group reported revenue of $4,370m (2018 Pro-forma: $4,657m) lower as expected compared to 2018, predominantly due to the strong comparative film slate. Group Adjusted EBITDA stood at $1,033m (under IAS 17) (Pro-forma 2018: $1,072m) and the margin was 23.6%, up 80bps.
Cineworld’s chairman Anthony Bloom had said in a company press release that the year 2019 proved to be beneficial for the company. The year, he said, witnessed more than 275 million people watching films on the firm’s screen. The company’s adjusted EBITDA was over a billion of dollars.
Mr Bloom added that the company’s net debt saw a reduction and there was a rise in its dividend.
However, coming to the year 2020 so far, the coronavirus pandemic has certainly punctured the Cineworld’s economic outlook. Even with scrapping the acquisition deal with Canada’s largest cinema operator Cineplex, as the latter has breached the arrangement agreement relating to the acquisition between the two firms and the two entities are now embroiled in a legal tussle over damages. With this development, Cineworld’s debt is looking more arduous than ever.
Moreover, the company is looking for additional borrowings from various institutions. It has sought emergency loans from the UK and the US government. Besides, long-term investors are also apprehensive about the cinema chain’s growing debt, considering that the company spent $568 million on debt servicing charges in 2019.
Given this scenario, the company may have to opt for a debt restructuring plan in the future. If this becomes a reality, then most probably the company’s shares will be diluted in a debt-for-equity swap, negatively impacting the existing shareholders.
Going by the company's market conditions and the growing coronavirus pandemic, investors have to be watchful about the outcome of the economic activities in the day to come and accordingly take a call on their investment plans for the future.
