Key points
- Litigation is ongoing and impacting the Cineworld share price
- Box office revenue is gradually increasing
- May be a good time for me to add to my current holding
The Cineworld (LSE: CINE) share price has been extremely volatile recently. A number of factors are responsible for this movement. The pandemic has battered this cinema business and a litigation case is a grey cloud over the stock. As the world reopens though, is this stock on the path to recovery? If so, should I be adding to my current holding? Let’s take a closer look.
Cineworld vs. Cineplex
A big part of the recent negative Cineworld share price action has been a litigation case brought by Cineplex, a Canadian cinema company. This case is about the withdrawal of Cineworld from a deal to take over Cineplex, on account of the former’s inferior financial position during the pandemic.
In December 2021, the Ontario Superior Court of Justice ordered Cineworld to pay £722m in damages, a decision the company instantly appealed. This immediately resulted in a 39% fall in the Cineworld share price. This ruling, together with an $8.3bn debt pile, was an obvious worry for investors.
In a recent update to the case, in January 2022, Cineplex launched a cross-appeal against Cineworld’s own appeal. This related to the possibility that the amount of damages payable may be significantly less than £722m, as this might be deemed too high. This development resulted in a 5% fall in the Cineworld share price, although I do not consider this update terribly negative. By contrast, it suggests that Cineworld may not have to pay as much as originally thought. That would only be good news.
Box office revenue supporting the Cineworld share price
Two recent trading updates, from November 2021 and January 2022, imply that the negative impact of the pandemic is wearing off.
For the four months to 31 October 2021, global group box office revenue for October was 90% of 2019 levels. The UK and Ireland segment scored higher results, at 127%. In the January update, for the six months to 31 December 2021, global group revenue for December 2021 was 88% of 2019 levels. For the UK and Ireland, this figure was only slightly higher at 89%. The latter update also confirmed Cineworld had generated positive cash flow for the fourth quarter of 2021.
Having held Cineworld shares prior to the litigation judgement, I have been badly stung by the recent price movements. Nonetheless, the cross-appeal from Cineplex gives me hope that Cineworld’s damages may not be as severe as first thought. What’s more, box office revenue is gradually increasing. With a number of high-profile films scheduled for release in 2022, like the Avatar sequel, I expect this trend to continue. I am therefore taking this opportunity to add to my holding and improve my average weighted price.
