Can Cineworld shares put on a show as theatres reopen?

Cineworld, the second largest cinema chain in the world, will start to reopen the bulk of its theatres in the coming weeks after months of being shut due to coronavirus-induced lockdown measures. But a weakened film slate, severely hit by a number of blockbuster films being delayed, puts Cineworld’s recovery at risk.

There are fears that the debt-burdened stock could struggle if it can’t deliver a strong recovery in the remainder of 2020, which is already a huge task considering it will have to operate at reduced capacity and with additional safety measures.

The fact it is now in the early stages of what could end up being a long and costly legal battle with Cineplex, the Canadian outfit it was due to buy before pulling out when the coronavirus crisis unravelled, only adds to its problems.

• When will Cineworld reopen its theatres?
• Is the film slate strong enough to fuel a recovery in 2020?
• Cineworld’s film slate for 2020
• Cineworld's film slate for 2021
• Why are studios delaying the release of new films?
• Cinemas vs streaming sites: will Covid-19 change how films distributed?
• Can Cineworld survive the coronavirus crisis?
• Cineworld’s legal battle with Cineplex will add further financial strain
• Where next for the Cineworld share price
• Cineworld shares: broker recommendations
• How to trade and invest in Cineworld shares

When will Cineworld reopen its theatres?

Cineworld operates 787 cinemas in ten countries, and all of these were forced to shut when governments began to introduce lockdown measures earlier this year. It started to reopen sites in the likes of Poland the Czech Republic in the middle of June, but its cinemas in its two main geographies, the UK and the US, remain closed.

The UK government gave the green flag for cinemas to reopen on 4 July, but Cineworld has pushed back its reopening date several times. The current intention is to reopen its 128 sites in the UK and Ireland on Friday 31 July, but it has warned this could change again. The company has introduced new measures to allow for social distancing, including online-only bookings, distanced seating, and staggered film times. Screens are expected to operate at 50% to 60% their full capacity.

Although Cineworld is the UK’s only listed cinema stock, the company has made the bulk of its money from the US since it acquired Regal Entertainment for $3.6 billion in late 2017, which completely changed the stock’s geographical focus.

Cineworld has also had to delay the reopening of its US theatres, having recently pushed the date back from the end of July and into August. Cineworld’s chief executive officer (CEO), Mooky Greidinger, told the Financial Times that it would ‘probably’ look to reopen US sites sometime between 7 August and 14 August. This follows the decision by other major US cinema groups, including the world’s largest AMC, to push their reopening back to August.

Is the film slate strong enough to fuel a recovery in 2020?

One of the main reasons Cineworld and others are holding off opening their US theatres is because they want a strong film slate to work with when they do finally begin welcoming back customers. But the cinematic calendar has been hard hit after several studios announced they were delaying the release of many of the blockbuster titles that Cineworld and others were relying on to underpin their recovery.

One reason the industry has said they will open the doors of their US theatres in August is because Christopher Nolan’s new film, ‘Tenet’, produced by AT&T’s Warner Bros studio, was pushed back to 26 August, and this film is seen as one of the key attractions upon reopening.

Disney has also dealt a severe blow by postponing the new Avatar and Star Wars films by a year and taking ‘Mulan’ off the schedule altogether, while others like Paramount Pictures has also pushed the release of the new Top Gun installation from December 2020 to July 2021.

This has taken some big-name titles out of the equation not only this year but also in 2021, when the industry will still be in recovery mode. This, twinned with uncertainty over how comfortable consumers will feel about returning to the big screen, will hamper Cineworld’s recovery.

Cineworld’s film slate for 2020

^{Data captured 28 July 2020}

Cineworld’s film slate for 2021

^{Data captured 28 July 2020}

Why are studios delaying the release of new films?

Cinemas may want a flood of hits to release when they reopen but the studios that make them know how important timing is if they want to achieve maximum results. The major hindrance is the uncertainty in the US, which is by far the largest cinema market in the world, and to an extent China, the second largest.

In 2018, the US industry reported over $11 billion in gross box office revenue followed by over $9 billion in China, according to Statista. The next largest market, Japan, only grosses $2 billion, demonstrating the importance of the US and China to world cinema.

Other major cinema markets, like the UK and Europe, are far from ridding themselves of the coronavirus, but the situation in the US is particularly problematic. The country has had over 4.2 million cases and the daily figure reached a new all-time high on 24 July, according to the US Centres for Disease Control and Prevention, and the seven-day average remains close to all-time highs.

This means the threat of further lockdowns is still firmly on the table, and the fact there is a tussle between state governors and the federal government is making the situation more unclear. Many matters are handled on a state-by-state basis, which also makes it harder for cinema groups to apply a blanket strategy and plan in general.

Studios have become accustomed to releasing more films around the world on the same date, rather than launching them at different times in different regions, not only to streamline their marketing but also prevent problems with the likes of piracy.

This means studios will have to wait until they are sure the US market is ripe for the taking before releasing their big titles, or run the risks of releasing them in more stable countries first and then in the US at a later date. The sheer size of the US market means studios are hesitant to release anything until the country is back up and running, even if that means depriving other major markets of titles in the meantime.

Cinemas vs streaming sites: will Covid-19 change how films are distributed?

Lockdown may have brought the world’s cinema industry to a halt, but streaming sites have been among the biggest beneficiaries as they attract new subscribers that are stuck at home.

The largest player, Netflix, added 26 million new paid customers in the first six months of 2020 compared to just 12 million the year before, while Disney’s new streaming service already has nearly 55 million subscribers even though it only launched last November.

A battle between cinemas and streaming sites has been building for years, but the coronavirus means it is intensifying. The serious sums being spent by Netflix has taken money away from theatres but improving quality has meant the company has started to be welcomed into formal film circles, demonstrated by its growing trophy cabinet.

The fact that Disney, one of the biggest film producers in the world, has launched its own streaming site to distribute content has added a further threat to cinema groups. Disney has already decided to release some titles on its platform that were previously destined for elsewhere, such as its new Artemis Fowl title.

In April, it was reported that Cineworld would no longer show new titles from Universal Studios after it decided to release ‘Trolls on Tour’ on the likes of Google Play and Amazon Prime Video rather than in the cinema as planned.

‘There is a certain system of windows which are a custom in the market and this sets the time difference between the theatrical market and other ancillary markets, among them streaming. Any movie that will not respect this window will not be shown in Cineworld group,’ said Cineworld’s CEO, Greidinger.

Greidinger also accused Netflix of allowing Michael Scorcese’s film ‘The Irishman’ put in a poor performance at the box office after launching it on its streaming platform less than one month after the cinema release.

The fear for cinema groups is that studios will increasingly look to distribute their new content through other platforms like streaming sites if the industry can’t operate sustainably in a world with coronavirus.

If theatres are closed again by future lockdowns then studios will become frustrated at not being able to release their new films as planned, and the flexibility and stability of streaming platforms could become more appealing.

This will be particularly true for those studios that now have their own streaming sites such as Disney, and will be compounded by the facts Amazon, Apple and others are investing more into their own content that will steal further customers from cinemas.

Still, streaming sites will not replace cinemas altogether any time soon. Releasing films in cinemas is still far more lucrative than streaming sites, and most of them are made with the big screen in mind. Blockbusters will still be targeted at cinemas, but we could see studios producing more content for themselves as streaming continues to gain traction.

Can Cineworld survive the coronavirus crisis?

The outlook is tough for the cinema industry as a whole but Cineworld has its own individual problems to deal with. The company’s expansion into the US was fuelled by debt, and the burden was exposed when lockdown brought operations to a halt.

It ended 2019 with $3.5 billion in net debt and that figure stood at over $7.6 billion when lease liabilities were included, which meant leverage was considerably higher than its 3x adjusted earnings target.

The company warned in March that it was at risk of not being able to service its debt when there was no money coming through the door, but it has since taken action to shore up the balance sheet and reduce its cash burn.

The dividend has been suspended, management have deferred their salaries, and it has taken advantage of government-backed loans in both the UK and the US whilst securing additional headroom from its lenders.

When it secured the extra liquidity in late May, Cineworld said this ‘will provide it with sufficient headroom to support the group even in the unlikely event cinemas remain closed until the end of the year’.

This implies Cineworld can survive even if a recovery doesn’t start in 2020 as hoped, but it does raise concerns about next year. If cinemas can stay open and attract an audience when they reopen over the coming weeks, then this should allow a recovery to gain traction as it enters 2021 and the film slate gets stronger.

But if it is plagued by further lockdowns because of a second wave of infections, then it could be in even bigger financial trouble at the end of the year than it is now.

This has raised the threat that Cineworld could be forced to ask investors for cash in the not-so-distant future, or even consider more drastic action such as downsizing its estate and sacking staff if the reopening is not as successful as it hopes.

Cineworld’s legal spat with Cineplex will add further financial strain

Cineworld faces a potentially lengthy and costly legal battle with Canadian cinema group Cineplex, which it agreed to acquire for $2.3 billion in December. However, Cineworld backed out of the deal after the coronavirus unravelled and fundamentally changed the landscape.

Cineworld pulled out in June after claiming Cineplex had breached the terms of their agreement and, having failed to rectify them, terminated the deal.

However, Cineplex denies breaching any of the terms and threatened to sue Cineworld for around $1.1 billion in damages, which Cineworld has said it will fight by launching a countersuit.

It is unsurprising that Cineworld has decided to back out of the deal, regardless of whether the agreement has been breached or not.

Firstly, Cineplex shares had lost around 75% of their value between the acquisition being agreed and the coronavirus hammering global stock markets in mid-March. This would have posed problems for the original valuation that was agreed, with Cineplex today worth just CAD$490 million.

Secondly, it was to be a ‘debt financed acquisition’ and accumulating such a significant amount of new debt is the last thing that Cineworld needs right now. Investors largely welcomed Cineworld’s decision to pull out of the acquisition as a result, although the potential legal case provides them with a new headache.

Where next for the Cineworld share price?

Cineworld has been one of the worst affected companies by the lockdown measures and shares have been hammered. At its worst point, shares hit a low of just 21.38p on 17 March – over 90% lower than the start of the year. Shares have nearly doubled in value since recording that low, but they still remain over 80% lower than the start of 2020.

Cineworld shares: broker recommendations

The tank in Cineworld shares has led some brokers to believe that the sell-off has been overdone and that the cinema chain is undervalued, but others think it has been justified due to the bleak outlook and debt-laden balance sheet. The average rating among the 10 brokers that cover stock is a Buy, and the average target price of 103.75p implies there is huge upside potential for Cineworld shares compared to their current price.

^{Source: Reuters}

How to trade and invest in Cineworld shares

With IG, you can trade on the world’s best trading platform and back Cineworld shares rising or falling. Go long (buy) if you think Cineworld shares will increase in value, or go short (sell) if you think they will decrease in value.

To take a position, follow these simple steps:

1. Create an IG trading account or log in to your existing account
2. Type ’Cineworld’ or ‘CINE.L’ in the search bar and select it
3. Choose your position size
4. Click on ‘buy’ or ‘sell’ in the deal ticket
5. Confirm the trade

You can also buy and hold Cineworld shares with IG’s share dealing service. This means you own the shares outright, benefit from any share price appreciation, and are paid any dividends that are declared while you own them.