Is the only way up for Cineworld shares?

Cineworld unveils full-year results on Thursday this week. The world’s second biggest film exhibitor, with operations in 10 countries worldwide, is set to exit the FTSE250 this month after its shares collapsed by 71% from 120p to just 32p in the past year.

The cinema sector was hit hard by the Covid-19 pandemic with moviegoers choosing to stay at home and stream films online rather than risk visiting theatres. What’s more, Cineworld has a substantial debt pile of $4.6bn and could be at risk of bankruptcy.

A failed bid to buy Canadian cinema operator Cineplex has led to extended legal wrangling and the risk of Cineworld having to agree to a large legal settlement, which would be greater than its market capitalisation. It has also secured a delay to the payment in relation to a previous settlement with investors in Regal, another cinema chain it purchased in 2017.

Cineplex seeks damages for the collapsed $2.1bn buy-out although, with Cineworld’s substantial debts, other creditors say - ironically - this could actually mean that the Canadian company is unlikely to receive a substantial pay-out. Nevertheless, it remains a major concern for investors.

Cineworld trading boosted by Spiderman: No Way Home

Trading is, however, turning a corner as audiences return to the cinema worldwide. In its trading update in January, Cineworld revealed that sales had recovered exponentially. In the six months to 31st December, versus 2019, total revenues increased by 90% in October, 56% in November and 88% in December.

Sales were boosted by the strong slate of films on offer, including Black Widow, Dune, FreeGuy and Spiderman: No Way Home, among other releases.

Spiderman: No Way Home has been a huge box office success despite the pandemic, grossing more than Avatar and Titanic and becoming the first film to generate $1.5bn in sales since the Covid-19 outbreak began.

"We are pleased to see continued strong demand amongst audiences for cinema experiences, supported by a slate of high-quality and high-performing movies,” chief executive Mooky Greidinger told investors in January. “This demonstrates that fans are continuing to choose the unrivalled theatrical experience.

“We have seen recovery in theatre attendances across our geographies, which generated a positive cashflow performance for Q4. Spider-Man: No Way Home has shown the importance for studios of cinematic releases. Whilst there are challenges ahead, we are excited to welcome customers to our cinemas to enjoy the highly anticipated slate of movies throughout 2022,” he added.

Bankruptcy could still be on the horizon for Cineworld

One of those challenges Greidinger mentions remains the risk of bankruptcy for the company. Indeed, Cineworld will likely remain lossmaking until at least next year. “While revenue is forecast to have more than doubled in the year, it won’t have been enough to stop the business from making a loss. In fact, Cineworld isn’t forecast to return to profit until 2023,” said analysts at AJ Bell.

Investors will also be looking to see how the future slate of cinema releases pans out. Major film titles scheduled for release in 2022 include The Batman, Morbius, Top Gun: Maverick, Jurassic World: Dominion, Minions: The Rise of Gru, Thor: Love and Thunder, Mission: Impossible 7, Black Panther: Wakanda Forever and Avatar 2. However, will this be enough to help the company's shares recover?

The shares have lost 88% of their value since April 2019 when they traded for as much as 299.94p. At 34.96p, it may look as if the only way is up and positive full-year results may provide a short-term boost. However, Cineworld is not out of the woods financially yet and its litigation with Cineplex continues. Plus, it is difficult to know what the long-term trends in the cinema sector will be, given the success of streaming platforms.

Trading will always depend on the quality of films available, which is largely out of Cineworld’s hands. Any further Covid-19 lockdowns or delays to major releases could hit revenues hard. As such, the shares are a sell.

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