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Cineworld Group Plc (CINE.L) - Fundamental Investment Case

Research

Publication Date: 27 Jun 2019 - By Robert Prather By Robert Prather
Actionable
Differentiated

Equity Fundamental Equity UK Consumer

Cineworld, which recently acquired Regal Entertainment in the United States, is now the second largest theater operator in the world. The company has about 9,500 screens across roughly 800 sites.  Cineworld gets 75% of revenue from the United States where Regal, AMC Theaters, and Cinemark operate in a dominant position. The second largest market is the UK and Ireland representing about 12% of revenues. The rest of the revenue comes from other countries in Eastern Europe and Israel.  

Cineworld, even accounting for the recent special dividend, continued to fall as Vision Research finalized the report.  However, Vision believes there is still downside and the disappointment of Toy Story 4's opening weekend could indicate the industry pressure highlighted in the report is already starting to have an impact.  YTD box office revenue is down about (9%), despite the fact that for the first time since 1993 the average ticket price has fallen year-over-year. 

Please download the full report for details on the Bear Case outlined below.

Qualitative Concerns:

  • After 2018 box office revenues were boosted by MoviePass, an unusually strong movie line up in 2019 could be the industry peak with box office falling in 2020.
  • Disney's purchase of Fox gives the company dominant market share (up to 40%) and the ability to further pressure movie rental costs. 
  • Pressure from Netflix and Disney could cause the viewing windows for movies to be negotiated lower.
  • Disney, and other movie producers, will start to push upcoming titles to their OTT products (Disney+) in order to gain long term subscription revenue.
  • The cinema industry, formerly an oligopoly, has seen one competitor (AMC) push aggressively into the subscription business offering big discounts on both tickets and concessions. 

Fundamental Concerns:

  • Cineworld and Regal are seeing weak revenue and US market share losses specifically to AMC A-List.
  • Regal acquisition seems risky due to market share losses, historical under investment, and increased leverage.
  • EBITDA margins and Regal's high ticket prices could come under pressure from subscription competition.
  • Optimistic estimates imply both a record box office and market share gains. Vision believes both could disappoint. 
  • Valuation appears cheap, however there is still room for downside.

Bottom Line: Leveraged cinema operator facing intense competition and a changing industry from OTT products and Disney consolidation

cineworld

Source: VR Fundamental

Pages: 45

Released: 27 Jun 2019

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The Author

Robert Prather

Equity Analyst

Technology, Consumer, Industrials, Telecom & Media

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London, United Kingdom

info@reachx.co
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