Is Cineworld’s share price heading towards zero?
At the start of 2019, things were going well for Cineworld (LSE: CINE). The company had just acquired Regal Entertainment Group and was looking to make further acquisitions with the goal of becoming the world’s largest cinema operator. Cineworld’s share price was also booming, priced at around 300 pence. Fast forward a few years and things are a lot less pretty. On the one hand, the shares are only 65p. In addition, its debt of nearly $ 9 billion is both excessive and unsustainable. Therefore, are stocks trending towards zero or will they be able to make a remarkable comeback?
The recent business update demonstrated that the problems Cineworld faced due to the pandemic continued into 2021. In fact, the company reported an operating loss of $ 208.9 million, while revenues were only $ 292.8 million. This was mainly caused by temporary cinema closures from January to May 2021, as well as very few film releases.
But while these results were pretty appalling, Cineworld’s share price still rose because of them. This was due to several reasons. First, there was an improvement over last year, when its operating loss was much larger, at over $ 1.3 billion. Part of the reason is that there had been reversals of asset write-downs of $ 95.6 million, showing heightened optimism.
Second, investors were also encouraged by the possibility of a listing in the United States. It would either be a full list from Cineworld or a partial list from Regal Entertainment. Hopefully this will maximize shareholder value, potentially following in the footsteps of its rival AMC, which has seen its stock price soar 760% in one year to over $ 50. It was part of a short squeeze.
As a result, this could be a catalyst for Cineworld’s share price, as it would allow it to consolidate its balance sheet through a capital increase. It would also allow him to reduce his huge debt load. But of course, there is no guarantee that this US listing will happen, or that it will have a positive influence. Therefore, I certainly don’t buy just on this news.
The main concern I have with Cineworld shares is the financial condition of the company. This is the reason why I think it is possible that stocks are heading towards zero. In fact, at the end of June, the group had outstanding US term loans of $ 3.7 billion, a term loan in euros of $ 224 million, a private placement loan of 244.5 million. M $ and a fully drawn revolving line of credit of $ 449 million.
For a company with a market capitalization of less than £ 1 billion, this is massive debt. It also results in very large financing costs, which an unprofitable company may have difficulty keeping up with. In fact, interest on these loans totaled $ 126.6 million in the first half of 2021, far more than the $ 72.9 million in the same period last year.
The loans also have several covenants, including one that requires the net debt to adjusted EBITDA ratio to be less than 5. In the Company’s baseline scenario, these financial covenants would not be breached. Nonetheless, this assumes that theaters will remain open all the time, at 90% of 2019 levels in 2022 and 95% of 2019 levels in 2023. Such admission levels are certainly not guaranteed. Therefore, the possibility that commitments will be violated is high. In the worst case scenario, this would mean that the loan becomes due immediately. In the current financial situation of Cineworld, that would be very difficult, and it could even be a factor leading to bankruptcy.
The recent trade update also revealed that he had negative equity of $ 280 million. This means that its liabilities outweigh its assets, which is often a major sign of financial distress. So even if Cineworld sold its assets to pay off its debt, it still wouldn’t have enough. This greatly increases the chances that the Cineworld share price is heading towards zero. Such a factor is an extremely important risk that I must consider before investing in Cineworld.
While there is a possibility that the Cineworld share price is heading towards zero, there is also the possibility that the share price will explode. A major plus point is the fact that new films are coming out. These include the new Spider-Man in December and the new James Bond at the end of this month. I’m optimistic that this could lead to a big increase in demand in theaters and admissions could be similar to 2019 levels. Hopefully this can help Cineworld achieve profitability at some point, a factor that should drive up the Cineworld share price.
Recent trade has also been positive and there have been signs of increasing demand. In fact, in the US and UK, data shows movie theater attendance figures have already returned to around 50% of pre-pandemic levels. This indicates that people still want to go to the movies and that consumption habits have not changed for streaming services in the long run.
In addition, at the end of June 2021, Cineworld was operating 98% of its theaters in the United States and 99% in the United Kingdom. This implies that normalcy is starting to return.
What’s next for the Cineworld share price?
If things continue to move closer to normal, I can’t see the Cineworld share price drop to zero. Instead, I think there would be room to move up, especially if it comes down to profitability. It would also allow him to repay part of his debt, a factor currently holding back the business.
But if coronavirus cases continue to rise, Cineworld could be one of the worst-hit stocks, especially if there is another lockdown. In this scenario, there is a realistic chance that the company will go bankrupt and the stock price will drop to zero. In this case, the shareholders would be left with nothing. I’m all for taking a risk, but even that is way too risky for me. This means I stay away from Cineworld, at least until I can see signs that bankruptcy is out of the question.