The $5.8bn (£4.5bn) acquisition of US-based Regal Entertainment by Cineworld (CINE) has made it the second-largest cinema chain in the world by number of screens. Naturally, the scale of the deal had a dramatic impact on interim figures, not least by the switch to reporting in US dollars aimed at minimising the translational effect from foreign exchange rates. The US now accounts for around three-quarters of group revenue, compared with the UK and Ireland which bring in 14 per cent.
The acquisition completed in late February, but the integration process is ongoing. Management previously estimated it could find $100m worth of cost synergies, but has now said further benefits may be found.
Even ignoring the acquisition, Cineworld appears to be in good shape. On a pro-forma basis at constant currency (which assumes Regal was part of the group all along) group revenue rose 10.8 per cent to $2.46bn, with adjusted cash profits up 14.1 per cent to $554m. Six sites holding 56 screens opened during the period, bringing the screen total to 9,542, while another 12 sites with 111 screens will open their doors before the year-end.
Numis has yet to rebase forecasts into US dollars, so for the time being expects pre-tax profits of £314m in 2018, giving EPS of 18.6p, compared with £128m and 38.9p in 2017.
|ORD PRICE:||297p||MARKET VALUE:||£ 4.07bn|
|TOUCH:||297-297.2p||12-MONTH HIGH:||324p||LOW: 210p|
|DIVIDEND YIELD:||2.8%||PE RATIO:||13|
|NET ASSET VALUE:||251¢*||NET DEBT:||106%|
|Half-year to 30 Jun||Turnover ($bn)||Pre-tax profit ($m)||Earnings per share (¢)||Dividend per share (¢)|
*Includes intangible assets of $6.14bn, or 448¢ a share
**Adjusted for USD reporting and four-for-one rights issue £1=$1.29
Shares may have recovered from their rights-issue induced drop, but at 16 times forward earnings still trade at a discount to their two-year average and the sector. The Regal deal prompted a net cash outflow, but cash would still have been constrained without it. Overall, we’re cautious: the US is a highly competitive entertainment market, and Cineworld's success is largely dependent on blockbuster releases. Hold.
Last IC view: Hold, 249.4p, 16 Mar 2018