Cineworld warns on going concern status

Cineworld (CINE) flagged that there is “material uncertainty” over whether it can repay its debts, avoid paying a massive damages bill, and ultimately continue as a going concern. The cinema company enjoyed significantly improved trading volumes after a disastrous 2020 when pandemic restrictions closed its sites, but the results still lagged behind pre-pandemic levels as customer demand continued to falter.

The company has a fully-drawn revolving credit facility of $463mn (£354mn), which has a June covenant testing date. It is now unclear if Cineworld “will be able to pay down” the debt in the summer if there is any major impact from reduced admission levels, film delays, and rent payments before then. Not good.

There is also a potentially disastrous C$1.23bn (£737mn) bill hanging over the company after the Ontario Superior Court found in favour of a claim brought by Canadian entertainment company Cineplex, after Cineworld pulled out of an agreement to acquire the business. While Cineworld is appealing the court’s judgement – no damages was recognised in the accounts – the company said that if its appeal failed it “would not have sufficient liquidity to pay the existing level of damages awarded”.

On the positive side of things, admissions levels shot up by three-quarters to 95mn. But there is a steep hill to climb to hit the 275mn customers who plonked themselves down on Cineworld’s seats in 2019, despite the fact that cinemas only reopened in April/May 2021. The company forecasts that admissions will recover to 2019 levels in 2024, though you wonder if a combination of lockdowns and the proliferation of streaming services have permanently altered consumer choice in this area.

The shares are trading on a consensus 11 times forward earnings. Until there is more clarity on the debt position and the legal case, Cineworld’s future looks very uncertain – head for the exits. Sell.

Last IC view: Sell, 33p, 15 Dec 2021