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Cineworld presents a bright picture

Cineworld's shares offer a good dividend yield and solid earnings growth prospects on a modest rating
March 14, 2013

Cineworld (CINE) has built an impressive growth record and the cinema operator's solid progress looks set to continue. Despite this, its shares trade on an ordinary rating that does little to reflect the company's virtues. That makes its shares an attractive prospect for buy-and-hold investors who want a decent slug of income.

IC TIP: Buy at 279p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points
  • Nice dividend yield on a growing payout
  • Customer-friendly plans
  • Picturehouse acquisition boosts long-term growth prospects
  • Strong start to 2013
Bear points
  • Tough consumer environment
  • 3D revenues weakened

From the perspective of income, the yield, which is 4.4 per cent based on 2013's likely payout, is nice. Yet Cineworld has a record of raising the payout by about 5 per cent a year (2012's payout rose 7 per cent), and that makes the income play look really tempting. Over the long haul, it should also support the share price as investors searching for both income and dividend growth bid up the share price.

But broker Numis also reckons that Cineworld's EPS will grow by about 9 per cent compound for the three years to 2015. And, given the confidence that investors can take from the company's track record and the defensive characteristics of cinema attendance, the rating of 12 times 2013's forecast earnings looks undemanding. What's more, over the three-year period Numis thinks that net debt as a multiple of cash profits will drop from 1.9 times to just 1.0 times.

Cineworld (CINE)
ORD PRICE:279pMARKET VALUE:£417m
TOUCH:278-279p12-MONTH HIGH:287pLOW: 196p
DIVIDEND YIELD:4.4%PE RATIO:12
NET ASSET VALUE:126pNET DEBT:67%

Year to 31 DecTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
200933330.814.410.0
201034330.414.810.5
201134833.416.811.0
201235938.519.411.8
2013*40347.423.012.4
% change+12+23+19+5

Normal market size: 1,300

Matched bargain trading

Beta: 0.5

*Investec Securities forecasts

Besides, Cineworld could have positive surprises in store as a number of plans have the potential to boost performance. The company has already demonstrated the benefit to profit margins of its investment in digital projectors, which have cut labour costs as well as increasing programming flexibility. Indeed, despite higher film costs and abolishing online booking fees, in 2012 cash profit margins rose half a percentage point to 18.7 per cent. This year, all the company's cinemas will have digital projectors. Management is also attempting to boost online sales and analysts think there is scope to spruce up its retail offering. Management has also introduced various customer-friendly plans, such as booking via mobiles and 'Unlimited' club membership, which brings subscription income. These have countered weakening demand to watch 3D films.

Cineworld also made a major acquisition last year, which has the potential to boost its long-term growth prospects. It bought Picturehouse for £47.3m, which takes it into the world of art-house cinema where audiences tend to be older and more affluent. Serving a different demographic to Cineworld's usual multiplex crowd should increase the potential for long-term expansion. The first two new Picturehouse cinemas are expected in 2014. Meanwhile, four new Cineworld cinemas are planned this year and another 21 should be added by the end of 2017. That compares with a current estate of 80 Cineworld outlets and 21 Picturehouse cinemas.