Structural changes remain a concern for Cineworld

Cineworld, which owns almost 10,000 screens across ten nations, represents one of UK investors’ few options to invest in the cinema business and has often held a role as a bellwether for the industry.

Over the past 18 months, its turbulent performance has reflected investor perceptions of the movie trade’s persistent forced closures.

As the UK entered lockdown in March 2020, the share price for the FTSE 250 stock collapsed, falling nearly 80% in three weeks. 

By October 2020, the price had tanked again on renewed lockdowns, down to a low of 24 pence per share, more than wiping out its 14 years of stockmarket gains to a figure 72% lower than its 2007 debut.

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Since that all-time low, the stock had risen 239% at the time of writing (30 September), with Bond alone adding 15% in the three days before its release. This brings Cineworld’s stock up to 83p as we return to the big screen, although this is still shy of its 86p IPO and a world away from its 324p zenith.

Despite this upward trajectory for the world’s second-largest cinema chain, it remains the most shorted stock in the UK. These positions could well be tied to the $3bn loss it posted for 2020, but given the company was heavily shorted pre-pandemic, it is also likely to be tied to a variety of structural issues facing the silver screen.

These concerns are perhaps best characterised by the rise of the streaming giants such as Netflix, which currently holds a market cap 170x greater than that of Cineworld.

However, James Thorne, manager of Threadneedle UK Smaller Companies, argued the death of cinema has been touted several times and has yet to succumb to the purported bell tolls.

“Many times over the past 40 years people have predicted the death of cinema, for reasons from VHS video and CDs to surround sound,” he said. “The most recent prediction was that Netflix and Covid-19 would act as catalysts to accelerate this.

“The reality, however, shows growing success for blockbuster films and that cinema attendance is in rude health.

“Similarly, cinema goers are willing to pay more for better sound, picture quality and environment, and they are spending more money on food and beverage as part of the experience including the fabled popcorn cone.”

This investment in the experience of cinema is also cited by senior investment and markets analyst at Hargreaves Lansdown Susannah Streeter, who explained the tightening of the theatrical window has forced innovation by chains.

“With windows of exclusivity narrowing, cinema chains can no longer rely on big names alone to sell seats,” she explained. “They are having to compete with the streaming and movie on-demand giants by offering a high-end cinema experience, and we are likely to see many more technological innovations in this space.”

Bond was no exception to this spate of innovation as Cineworld tried its utmost to capitalise on the biggest release since cinema returned.

“Cineworld is trying hard to squeeze every ounce of profitability from this latest blockbuster by offering the movie in multiple formats,” Streeter added. 

“From moving seats to strobe lights and water jets of the 4DX cinema, to the ScreenX 270 degree viewing experience and even the VIP dress up as Bond offer, Cineworld is desperate to drag movie lovers in the US and the UK from the comfort of their own couches back to the big screen experience.”

While the run-up to Bond has clearly buoyed Cineworld’s share price and confidence in the industry, chief market analyst at IG Group Chris Beauchamp suggested it is too early to judge the impact of the tentpole picture.

“Tempting as it might be, judging the release’s impact on cinema stocks on the first few days would be a mistake, since plenty of potential viewers will be waiting to let the initial fuss die down,” he reasoned. 

“That said, a solid performance at the box office over the next few weeks offers real hope that the sector is witnessing a bounceback, and with sentiment still very shaky, the film offers the best chance of a rebound in many weeks.

“As Cineworld’s strong share price performance to start the week suggests, Bond’s return may prove the bellwether for the next stage of the reopening trade.”

Cineworld itself has been very bullish on its potential this year, with the firm suggesting it could return to “business as usual” by the end of the year and reach 85% of 2019 revenues by Q4, Streeter noted.

In its interim results in August, Cineworld Group CEO Mooky Greidinger said he was “confident that the business is in a strong position to execute its strategy and deliver a return to growth as we recover from the pandemic and capitalise on the forthcoming strong film slate alongside clear pent-up consumer demand”.

However, while the runway is looking much clearer for the cinema chain, Streeter’s optimism was not quite as strong.

“Bond alone will not be the secret weapon back to health but with a pipeline of blockbusters lined up it does appear that the path ahead is now smoother for the company.”

“However, it is unlikely that ticket sales will ever fully recover to the heady days of the past, given the huge shake-up of the movie industry.

“Fresh capital expenditure is the last thing Cineworld needs right now, given that it is already saddled with very high levels of debt, but it clearly believes investing in immersive experiences should help the longer-term recovery.”