Why I’m not giving up on my Cineworld shares just yet

Cineworld shares have been fairly flat recently, but are underlying problems really as bad as they seem?

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Key Points

  • Losses narrowed significantly between 2020 and 2021, falling from $3bn to $708m
  • Revenue increased from $852m to $1.8bn over the same time period
  • While admissions figures are improving, they are still below pre-pandemic levels

There was some tension in the market as investors anticipated the Cineworld (LSE:CINE) annual results last month. While some believed they would simply be another negative story about a company up to its eyeballs in debt, others saw change on the horizon.

What do these results tell us about the business going forward? Should I be making any changes regarding my own Cineworld shares? They currently trade at 33.15p, down 66% in the past year. Let’s take a closer look.  

Why the litigation issue might not be as bad as it seems

First of all, there is the ongoing litigation issue with Canadian peer Cineplex that saw the latter awarded over £700m damages after Cineworld abandoned a takeover agreement. This amount would become an unsecured debt and could threaten the existence of the company.

While the appeal against it is ongoing, it could be Cineworld’s debt pile that ironically brings it back from the brink. No actual damages amount has been classed as ‘receivable’ because Cineworld already has such a large debt pile. 

In the event of Cineworld’s bankruptcy, therefore, Cineplex would be considered one of the last in line to receive payment. This would likely amount to very little indeed. 

I think that it is in the interests of both companies to reach an out-of-court settlement. This would relieve some intense short-term pressure on Cineworld. 

Recent results and Cineworld shares

As a shareholder, I just wanted to see an improvement in revenue and a limit on any new debt in the annual results. That is basically what happened. 

One of the brightest parts of the results was the significant narrowing of losses. In 2020, when many cinemas were closed because of the pandemic, the firm reported a loss before tax of $3bn. 

By 2021, when the business was open for around 75% of the year, losses were limited to $708m. This is an early indicator that Cineworld shares may be set to stabilise.

The same trend can be seen in admissions and revenue figures. 

Some 95.3m cinema-goers passed through the company’s doors in 2021, up from 54.4m in 2020. Similarly, revenue increased from $852m to $1.8bn. Revenue was something I had been watching closely and I was pleased to see this change. 

Despite this, these results were still well below pre-pandemic levels. Admissions in 2019 totalled 275m, while revenue stood at $4.3bn. This is a reminder that the firm has a long way to go.

While the results didn’t really surprise me, I think it is fair to call them mixed. The business was never realistically going to surge back to 2019 levels in such a short space of time. 

Going forward, debt is something that needs to be addressed. It increased last year by about $492m to total $4.8bn. 

Overall, this is a company facing a number of immediate challenges. While it is not out of the woods yet, I think it is realistic to think it might emerge at some point. An exciting film slate this year, including Mission: Impossible 7 and Avatar 2, should boost revenue further. While the situation is still perilous, I’m not giving up on my Cineworld shares just yet.   

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Andrew Woods owns shares in Cineworld. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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