Key points
- Strong December trading suggests demand is returning to normal
- Cineworld generated positive cash flow in Q4
- Debt problems and legal woes mean shareholders could still face big losses
The Cineworld (LSE: CINE) share price rose 20% in January. With the pandemic seemingly easing and Covid restrictions being lifted in the UK, my guess is that investors were buying into the reopening trade.
However, Cineworld shares are still worth 75% less than they were two years ago, at the start of the pandemic. Should I look at this as a buying opportunity for my portfolio, or are there hidden risks?
Let me explain why the stock rose in January — and what I think will happen next.
December boost lifts shares
The good news is that customers are heading back to the cinema. In January, Cineworld said revenue in December reached 88% of 2019 levels, thanks to popular new films like Spider-Man: No Way Home.
Even better, Cineworld managed to achieve positive cash flow in the final quarter of last year. That’s an important milestone on the road back to profitability, in my view. This should mean — hopefully — that the company didn’t need to draw any further debt to support its operations during the quarter.
The year ahead looks promising too. New films due for release include The Batman and Top Gun: Maverick — potential blockbusters.
I’m worried about the numbers
I’m confident cinemas will make a good recovery. I don’t think we’ll stop wanting to watch movies on the big screen.
What worries me is that the Cineworld share price could start falling again, due to the group’s financial situation. Cineworld’s latest accounts show net debt of $8bn. The company is also appealing against a recent legal ruling that could add a further C$1.25bn of liabilities.
Broker forecasts suggest Cineworld’s operating profit could bounce back to $680m in 2022. Unfortunately, this figure is calculated before financing costs, such as interest payments. My sums suggest these are likely to total at least $600m in 2022 — wiping out most of the group’s profits.
I think the pressure is mounting on CEO and shareholder Mooky Greidinger. This week, the company said it is now trying to reschedule some of its debt repayment obligations. While these talks are ongoing, the company has asked some of its lenders to waive, or overlook, any non-payment for a period of time.
Restructuring the group’s debts could push repayment dates further in the future. It might be enough to save Cineworld from having to raise money by selling new shares. But if an equity raise does go ahead, I think existing shareholders could see the price of their stock collapse.
Cineworld share price: my decision
Cineworld is the world’s second-largest cinema chain, with a big presence in the key US market. I think we’ll see a strong recovery in customer numbers over the coming year.
However, the company’s financial situation carries too many warning flags for me. There’s no way I can predict what might happen.
I have a golden rule in situations like this — stay away. I’ll be taking a close look at Cineworld’s 2021 results when they’re released in March. But, for now at least, Cineworld shares are far too risky for me.
Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
