Join our community of smart investors

Buy Cineworld for blockbuster results

The cinema group continues to expand across Europe while refurbishing existing locations in the UK, keeping movie-goers coming back for more
August 17, 2017

Going to see a film is not just about what you’re watching. It’s about the comfort of your seat, quality of the screen, variety of snacks for selection, and how you feel about the atmosphere. Cineworld (CINE) knows this well. Its locations around the world total 2,136 screens and prioritise “better sightlines, bigger screens, better sound and great comfort”, according to chief executive Mooky Greidinger. This theatrical experience has people coming back for more. The interim results revealed a 10 per cent increase in admissions to 50.7m customers pushing constant-currency box-office revenue up 12.6 per cent to £267m. Cineworld is making refurbishments a priority so that people continue to think of going out watch a film as a premium experience with updated audio and visual technology.

IC TIP: Buy at 723p
Tip style
Growth
Risk rating
Medium
Timescale
Medium Term
Bull points
  • Strong admissions growth
  • Higher retail revenue
  • Improved screen advertising
  • On track to open more locations
Bear points
  • Expensive valuation
  • Exposure to quality of film releases 

More people coming through the doors benefits the company beyond just ticket sales. Constant-currency retail sales improved by 16.3 per cent over the half year to £103m as more movie goers reached for snacks and drinks. Advertisers are also willing to pay more for time on the screen before the show starts if they know that more people will be there to watch the promotions. Other income, which includes revenue from advertisers, was up 3.5 per cent to £49.7m.

Significantly, for the first time overseas cash profits outstripped those from the UK for the first half, which was helped by sterling's weakness. Much of Cineworld's international expansion has been focused on Eastern Europe where rising incomes are leading to long-term structural growth in cinema attendance, which bodes well for future prospects.

As well as international growth, a strong raft of first-half film releases helped buoy trading including box office hits “Beauty and the Beast”, “Guardians of the Galaxy Vol. 2”, and “La La Land”. The second half has also started well with  “Dunkirk” and “Spider-Man: Homecoming” pulling in the crowds. Meanwhile, there are big hopes for “Star Wars: Episode VIII” at the end of the year. There is expected to be a lull in big releases in autumn, though, highlighting the dependence of cinema chains on block buster movies.

To counter this inherent feature of the movie business, Cineworld continues to work hard to boost revenue visibility through its customer loyalty schemes. A key focus is Cineworld's “unlimited” programme, which Mr Greidinger says represents around a quarter of group revenue. This subscription service allows members to watch as many films as they like in exchange for monthly billing of £18-£19. The service is often sold as a year subscription, adding the visibility it provides. Those on the unlimited scheme also receive discounts on food and drink at the cinema, which helps to encourage them to spend more. The group is continuing to expand the scheme beyond the UK into more of its international markets, most recently introducing unlimited subscriptions in Poland at the end of 2015, its second largest market by number of screens.

Cinema attendance has historically tended to be relatively resilient to wider economic trends, and the group shows little signs of succumbing to the negative consumer pressures that companies operating in other parts of the leisure sector have felt this year. Its focus on investing in its cinemas also means it has been unfazed by the rise of online video-streaming services such as those offered by Amazon and Netflix.

CINEWORLD (CINE)   
ORD PRICE:723pMARKET VALUE:£ 1.97bn
TOUCH:722-723p12-MONTH HIGH:745pLOW: 528p
FW DIVIDEND YIELD:3.2%FW PE RATIO:17
NET ASSET VALUE:263p*NET DEBT:43%
Year to 30 DecRevenue (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20146197524.413.5
20157069929.717.5
201679811134.719.0
2017**90912939.221.6
2018**95613741.823.0
% change+5+6+7+6
NMS:2,000   
Matched bargin trading    
Beta:0.51   
* Includes intangible assets of £726m or 267p per share
** N+1 Singer forecasts