Rolls-Royce (LSE:RR) and Cineworld have both seen their share prices plunge over 80% in a year. Many British companies are struggling, but these two could be among the hardest hit. While some stocks have fully recovered from the lows of the Covid-19-induced market crash, others have fallen further. Two of these are Rolls-Royce and Cineworld.
Debt and dilution
Prior to Covid-19, Rolls-Royce looked to have a perfect business model. It sold its aircraft engines at a loss, to benefit from a recurring income based on air miles flown. With a booming aviation industry, this was a great way to bring in a steady income stream. But the unforeseen global shutdown in flights put paid to this with devastating effect. It no longer has this recurring income that it relies on to keep its expensive business running.
The Rolls-Royce share price is down 81% year-to-date and earnings per share are negative. There have been rumours of an impending rights issue for weeks and today it announced its plans to go ahead. It intends to raise £2bn through this fully underwritten 10 for 3 rights issue. This gives existing shareholders access to shares at 32p each, a 41% discount to the closing price of £1.30 per share yesterday. If successful, it will have access to a new two-year £1bn loan facility too.
The company will also attempt to raise an additional £1bn through debt issuance in the bond market soon. And it’s received an indication of support in principle from the government department UK Export Finance to extend its 80% guarantee to support a potential £1bn increase in the company’s existing five-year £2bn loan.
The FTSE 100 constituent hopes the rights issue will be enough to improve liquidity and reduce leverage on its balance sheet. It’s subject to shareholder approval at its AGM on October 27. Management has already cut 9,000 jobs and I think it’s doing all it can to survive the pandemic. Whether it can make a full recovery will very much depend on how quickly flight travel returns to 2019 levels.
Cineworld’s dwindling revenue
FTSE 250 firm Cineworld is another company suffering at the hands of Covid-19, but its problems started before that. It began acquiring cinema chains to propel it to become the biggest cinema group in the world. This may have been successful had Coronavirus not come along and scuppered its plans. It now has a mountain of debt and very little revenue coming in.
Some 73% of its revenue usually comes from the US and considering the Covid-19 situation there, that’s not reassuring. Lockdowns continue and the upcoming election is causing political unrest. I don’t think this bodes well for cinema attendance to return to normal soon.
Is now a good time to invest?
Billionaire investor Warren Buffett once said that “it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
I agree, as long as the company is truly wonderful and likely to stand the test of time. I think Rolls-Royce could do this, considering its history, its importance to Britain and its involvement in artificial intelligence. However I’m not so sure about Cineworld. I think both the Rolls-Royce and Cineworld share prices will remain volatile until a vaccine is in circulation. Without a dividend, they look a risky buy.
