The Cineworld Group (LSE: CINE) share price is down by 30%, as I write, after the company said it would close all 663 of its UK and US cinemas.
Delays to movie release dates mean Cineworld is struggling to attract customers to cinemas. However, I still bellieve cinemas have a long-term future, despite the problems caused by Covid-19. With Cineworld shares now trading at all-time lows, should I be buying?
007: No time for a new release
Last week’s decision to delay the release of the latest James Bond film, No Time to Die, appears to have been the final straw for Cineworld boss Mooky Greidinger. In April, this important release was postponed until November. 007’s latest outing has now been delayed until April 2021.
Film studios are reluctant to release major films when important US markets — notably New York — are still closed due to lockdown restrictions.
Without a pipeline of new films, Cineworld says it can’t attract enough customers to cinemas “against the backdrop of Covid-19.” So it’s temporarily closing US and UK operations, putting 45,000 jobs at risk. The company hasn’t set a date for reopening these venues.
Delays to major new film releases are obviously a problem. But I think Cineworld’s closure is being driven by financial pressures relating to its history of acquisitions. These risks already existed before the pandemic took hold.
House of cards: about to tumble?
As I reported in May, Cineworld’s net debt pile had reached $3.5bn by the end of 2019 — before Covid-19 became an issue. This gave the stock a leverage multiple of around 3.4x EBITDA earnings — well above my preferred maximum of 2.0x-2.5x.
At the time, my view was that “there’s a good chance this debt mountain will be unmanageable without some kind of refinancing.”
Cineworld’s share price has fallen by another 50% since I made that comment. Meanwhile, the impact of the pandemic has caused the group’s net debt (excluding leases) to rise further, to around $4.2bn.
The company’s latest update confirms the group is “assessing several sources of additional liquidity.” Worryingly, management said that “all liquidity raising options are being considered.” In my view, there’s only one likely outcome for shareholders.
I think Cineworld’s share price will keep falling
I believe that Cineworld’s decision to close its UK and US cinemas reflects its financial difficulties more than its operational problems. Cineworld’s market-cap has now fallen to around £390m. By contrast, it has £3.2bn of bank debt and another £3.3bn of lease liabilities. With the majority of its cinemas closed, revenue will slow to a trickle.
I think Cineworld’s debt will need refinancing to enable the group to operate sustainably. And, with the company’s equity now worth so little, its lenders and landlords will be in control of the situation.
In my view, any financial solution that allows Cineworld to keep operating will require the company to issue new equity. Existing shareholders could face heavily dilution, or even a complete loss. I think the Cineworld share price could easily fall below 10p.
I rate Cineworld as a stock to avoid. If I owned the shares, I’d sell them today.
