Cineworld shares could hit 20p, says Morgan Stanley

Last week, shares in Cineworld surged more than 50% after rumours circulated that the company could be delisted and taken private by its founder.

The jump in its share price was the result of investors getting excited about takeover speculation after a US judge ended the ‘Paramount Decrees’, a set of antitrust rules from the 1940s that banned film studios from owning theatres.

The news, along with the rumours of Cineworld being taken private, led investors and city insiders to speculate that the group’s US business Regal, could potentially be targeted by a major Hollywood film studio now that the antitrust rules have been revoked.

However, not everyone is convinced by the deal rationale above, with Morgan Stanley stating that ‘the case for studios buying exhibitors has been weakened by the development of Premium Video on Demand (PVoD)’.

‘We think Covid has accelerated the maturation of the cinema industry, and with increased focus on direct-to-consumer streaming by the likes of Universal (new deal with AMC that reduced window to 17 days) and Disney (releasing Mulan on Disney+), we think the appeal for studios to vertical integration has reduced, not increased,’ Morgan Stanley wrote in a note.

In the days that followed, Cineworld has seen its share price slump, with the stock trading at 49p at the time of publication and down 77% year-to-date.

Morgan Stanley fears Cineworld shares will hit 20p

The US-based investment bank unsurprisingly offered a rather dim outlook for Cineworld in 2020, with its analysts giving the stock an ‘underweight’ rating with a price target of 60p, implying a potential upside of 22%.

However, that assessment is based on a best case scenario for the struggling cinema group, with Morgan Stanley issuing a 20p price target as a bear case, ‘which assumes a muted recovery and a derating to the low end of recent history’.

‘We think Covid has diminished the company’s capex-driven bull case and accelerated structural risks from streaming and PVOD through which studios generate superior economics,’ Morgan Stanley said in a note.

IG analysts believe stock could return to March lows

The price has resumed its march lower, and has seen little in the way of sustained upside since early June, according to Chris Beauchamp, chief market analyst at IG.

‘Lower highs and trendline resistance from the June peak continue to dominate the outlook,' he added. ‘Below 34.6p the price will be left with the March low of 19.2p as a downside target.'

A major downside risk for Cineworld is the recent deal between AMC Entertainment and Universal Pictures, which Morgan Stanley has described as representing a ‘paradigm shift’ in the relationship of exhibitors and film studios.

The deal essentially shortens the exclusivity of all films produced by Universal Pictures and Focus Features from 75 days in theatres to just 17days, after which the studio is allowed to screen its titles across premium on demand (PVOD) platforms like Netflix, Amazon Prime Video, Disney+ and Hulu.

This new arrangement means that film fans will only have to wait a two and half weeks rather than months to watch their favourite movies from the comfort of their home, which could see the popularity of cinemas wane.

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1. Create an IG trading account or log in to your existing account
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3. Choose your position size
4. Click on ‘buy’ or ‘sell’ in the deal ticket
5. Confirm the trade