Join our community of smart investors

Cineworld shows solid growth

Cineworld (CINE) is a quality stock, and one we think most investors should hold in their portfolio.
January 1, 2015

A major deal in eastern Europe, a change of key management and a soft UK summer box office all softened sentiment towards cinema chain Cineworld (CINE) during 2014. But we think investors would now do well to focus on the group's bright growth prospects and decent yield.

IC TIP: Buy at 401p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points
  • Strong growth forecast for 2015
  • Significant director buying
  • Blockbuster film releases in Q4
  • Growth prospects in eastern Europe
Bear points
  • Tough summer trading
  • Currency risks

The attractions of Cineworld's shares have been underlined by a multimillion pound barrage of director dealings. During October's market turbulence, the company's recently appointed chief executive and deputy chief executive, brothers Moshe and Israel Greidinger, spent over £18m on 5.7m shares bought at prices between 309p and 326p. The deals were done by their 54.8 per cent owned Warsaw-listed company, Global City Holdings, which is also landlord to some of Cineworld's cinemas.

 

 

The Greidinger brothers took the reins at Cineworld at the start of the year, when the existing business bought Polish company Cinema City International (CCI) in a transaction worth £900m. Since then, the enlarged company has been consolidating its position in the UK, while expanding its estate in eastern Europe, and it seems to have taken until now for the group's new direction to capture the market's imagination.

The cinema market across the UK and Ireland is dominated by three major operators: Cineworld, Odeon and Vue. Together, they account for more than 70 per cent of the market's total box office revenues, with Cineworld's share currently standing at 27.4 per cent. And Cineworld's domestic business is holding up well considering the wider decline in the market over the summer. Box office revenues dipped just 0.5 per cent in the first half compared with the market average fall of nearly 6 per cent. Weakly received releases were a key reason for the slow summer, but a slew of much-anticipated films, including the final instalment of The Hobbit and the latest Hunger Games film, should have boosted revenues before the year-end. And the new financial year will play host to the latest instalments of the James Bond and Star Wars franchises.

But the UK is not Cineworld's answer to future growth nor is it the reason for such bullish broker forecasts (see table). More than 500 screens are due to open in the next three years, the vast majority of which will be in Romania and Poland, which accounts for a third of CCI's sales. Expanding east means Cineworld is no longer reliant on a single geography to support its growth. Cinema audiences in eastern Europe are greatly underserved. Indeed, Cineworld is keen to capitalise on the fact that, currently, cinema trips per year stand at just 0.4 per capita in Romania, which has a population of more than 21m.

While the market does now seem to be warming to the growth opportunities, the announcement of the CCI deal in the first week of January 2014 initially prompted some panic, as did former chief executive Stephen Weiner's departure. He'd been with the business he founded for 18 years. And tough trading over the summer only led to more concern. But confirmation that the group will meet its full-year forecasts has bolstered confidence, as has trading for the 43 weeks to 13 November, which saw group sales up 1.1 per cent overall, reflecting the continuous steady growth Cineworld has a reputation for.

CINEWORLD (CINE)
ORD PRICE:401pMARKET VALUE:£1.1bn
TOUCH:400-401p12-MONTH HIGH:405pLOW: 290p
FORWARD DIVIDEND YIELD:3.4%FORWARD PE RATIO:15
NET ASSET VALUE:190p*NET DEBT:57%

Year to 31 DecTurnover (£m)Pre-tax profit (£m)**Earnings per share (p)**Dividend per share (p)
201134836.316.89.9
201235939.618.410.6
201340643.419.810.1
2014**62670.822.011.5
2015**73488.326.113.8
% change+17+25+19+20

Normal market size: 2,000

Matched bargain trading SETS

Beta: 0.63

*Includes intangible assets of £633m, or 240p a share

**Investec forecasts, underlying PTP and EPS figures