Cineworld shares precarious with potential easing of Covid-19 restrictions

• Cineworld share price up 41.38% in the year to date
• Significant retraction from 122.00p March 2021 highs
• Year-end net debt of over £3bn
• Third Covid-19 wave could risk Cineworld's progress
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Why is the Cineworld share price still displaying bearish tendencies?

Although investors in Cineworld shares will have enjoyed the 41.38% return so far this year, as of 11 June, the market sentiment remains uncertain towards the cinema giant.

Since reaching year highs of 122.00p in March 2021, the Cineworld share price has given back much of its gains, falling to 87.02p during early trading on 11 June.

Despite the increasing positivity about the full unlocking of the UK economy, Cineworld’s debt lingers like a millstone around its neck at present. Year-end net debt liabilities worth over £3bn are bad enough, but this increases further still to over £5.8bn when lease liabilities are factored in.

Even during its trading year of 2019 – before the Covid-19 pandemic struck – more than three-quarters (78%) of its operating profit was ring-fenced to service debt of over £400m. Cineworld was forced to increase its borrowing significantly throughout 2020, receiving over £700m in total. The sheer cost of servicing this debt alone approached £555m last year.

In total, Cineworld’s debt is approximately eight times its earnings before interest, tax, depreciation, and amortization (EBITDA) in the last year.

Is the threat of Covid-19 variants still weighing heavily on Cineworld shares?

The elephant in the room for Cineworld is the prospect of a third major Covid-19 wave across the UK. As the Indian variant spreads nationwide, the prospect of delays to fully unlocking Britain from Covid-19 restrictions becomes ever more likely.

Given its escalating debt situation, Cineworld can ill-afford another whole-scale shutdown of its operations. A return to the level of Covid-19 restrictions of pre-May 2021 would be catastrophic for Cineworld and the wider cinema industry. Despite this, Cineworld CEO, Mooky Greidinger, is hoping for a ‘good recovery in attendance in coming months’. All eyes will be firmly on Prime Minister Boris Johnson, who is due to make his decision on England’s ‘Independence Day’ unlocking, scheduled for 21 June.

What additional headwinds exist for Cineworld?

Although the current Cineworld share price represents plenty of upside against its all-time highs of 350p, with an overall 273% price rise over the last eight months, there are plenty of additional industry headwinds that could force Cineworld shares off course once more.

Aside from its balance sheet, and the delay in restoring its dividends to shareholders, Cineworld is also facing an uphill battle against the cultural decline of visiting the cinema. The company share price is still down by around 50% compared to 2019. Coupling the pandemic with the fact that box office figures have been in steady decline over the last two decades throughout the US, which remains Cineworld's biggest market, means analysts are understandably remaining wary.

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