Cineworld Group PLC (CINE) is a London, United Kingdom-headquartered operator of the cinema chain. It is one of the leading cinema groups in Europe and is the second-largest cinema exhibitor in the world. The group was originally founded in 1995 as a private company. The group acquired the UK operations of France-based cinema operator UGC in 2004. In May 2007, the group listed on the London Stock Exchange, and through a series of acquisitions, it has become one of the cinema business in the world. As of 31 December 2018, the group boasts 9,518 screens in 790 sites across 10 countries, employing around 30,000 personnel. Cineworld currently operates in the UK, the US, Israel, Romania, Bulgaria, Hungary, Slovakia, the Czech Republic, Poland and Ireland. The company primarily operates five brands: Regal, Cineworld, Cinemacity, YesPanet and Picturehouse.

On 28 February 2018, the company announced the completion of the acquisition of Regal Entertainment Group for $3.6 billion, with an implied enterprise value of $5.8 billion, to create the second largest cinema business in the world (by the number of screens). The acquisition allowed the company to access the attractive North American cinema market and created a globally diversified cinema operator across ten countries.

Key Statistics



Management

Anthony Herbert Bloom is the Chairman of the group; he was appointed on October 2004. Moshe (Mooky) Greidinger is the Chief Executive Officer of the company. He is supported by Israel Greidinger, who is the Deputy Chief Executive Officer.

Segments

The company’s segments, which are the principal format by which management makes operational decisions and made up of operating territories that are geographically close to one another, are the US, UK and Ireland and Rest of the World. UK and Ireland include the two cinema chain brands, Cineworld and Picturehouse; the Rest of the World include the cinema chain brand Yes Planet and Rav-Chen in Israel and Cinema City in Central and Eastern European countries; and the US include the three cinema chain brands Regal, United Artists and Edwards Theatres. With 7,269 screens in 555 sites, the US segment is the largest, followed by UK and Ireland, which has 1,038 screens across 100 sites.

Recent Development

On 13 June 2019, the company announced that the completion of sale and leaseback transaction, to a subsidiary of EPR Properties for cash consideration of $270.0 million. The deal relates to 18 United States-based multi-screen cinemas totalling 255 screens with a book value of US$ 230 million at the end of 2018, and the company will lease them back under 15-year leases on customary terms, in line with its existing business model of operating a predominantly leasehold estate.

Top Shareholders

 
(Source: Thomson Reuters)

Key Financial Highlights (FY 2018, in $m)


(Source: Company Filings)

The company’s statutory revenue increased by 259.11% to $4,119.1 million as compared with the financial year 2017 of $1,147 million, as a result of including Regal for the first time, and its revenue on a Pro-forma basis was $4,711.4 million, an increase of 6.3% on constant currency basis, as admissions rose by 2.6%. Consequently, Adjusted EBITDA increased by 259.1% to $925.4 million, while on a Pro-forma basis, adjusted EBITDA increased by 9.4% to $1,072.4 million, with an adjusted EBITDA margin of 22.8%, up from 22.1% in 2017.

The operating profit rose to $492.9 million, an increase of 198.7% as compared with the previous year. The group’s share from joint venture climbed from $0.1 million to $27.4 million in FY18.

The reportednet profit for the year attributable to equity shareholders of the group was $284.3 million, a surge of $154.8 million as compared with the financial year 2017 of $129.5 million.

Basic and diluted earnings per share increased to 22.5 cents and 22.4 cents respectivelyfrom the previous year. Adjusted basic and diluted earnings per share stood at 27.3 cents and 27.2 cents respectively.

The company’s Board had accelerated the cash dividend paid by 163.1%, and in the financial year 2018, the final dividend per share as proposed stood at 10.15 cents.

The total assets increased by $7,806.7 million, while net assets have increased by $2,375.6 million. Total net cash generated from operations was $687.4 million, reflecting strong cash generation at the operating level. Due to the acquisition of Regal and other movements, net debt of $3,733.2 million at the period end was higher as compared to the last year data.

Key Performance Indicators

Number of Admissions rose by 2.6% to 308.4 million on a pro forma basis. The Number of New Screens was 108, while the Total Number of Screens were 9,518, reflecting the acquisition of Regal. The Number of Premium Formats were also reported to have increased with IMAX screens increased to 130 from 35 in FY 2017, while 4DX Screens rose from 38 to 53. While Average Ticket Price rose by 2.4% to $9.3, Retail Spend Per Person rose by 3.6% to $4.3.

Financial Ratios


 (Source: Thomson Reuters)

The company’s profitability margins declined in the financial 2018 and were below the industry median. While the difference in some ratios was significant, others were marginally lower, and the net margin was in line with the industry median. The liquidity ratios were also less than the industry and declined in 2018. Though the leverage increased during the year, the leverage ratios of the company are near its peers’ median. The company had a higher asset turnover ratio, indicating better utilisation of company’s resources.

Valuation Methodology
Method 1:EV/EBITDAMultiple Approach (NTM)
   

To compare CINE with its peers, EV/EBITDA multiple has been used. The peers are Restaurant Group PLC(NTM EV/EBITDA was 5.71), William Hill PLC(NTM EV/EBITDA was 6.11),Greene King PLC(NTM EV/EBITDA was 7.91), GVC Holdings PLC(NTM EV/EBITDA was 7.95) and Merlin Entertainments PLC(NTM EV/EBITDA was 9.51) The mean of EV/EBITDA (NTM) of the company’s peers was 7.44x (approx.).

Method 2: Price/Earnings Multiple Approach (NTM)
 
Share Price Commentary


Daily Chart as at June-24-19, before the market closed (Source: Thomson Reuters)

On 24 June 2019, at the time of writing (before the market closed, at 09:50 am GMT), CINE shares were trading at GBX 250.80, down by 1.49 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 324.49/GBX 245.51. On the valuation front, the stock was trading at a trailing twelve months PE multiple of 11.3x, against industry median of 12.9x. The company's stock beta was 0.66,reflecting less volatility as compared to the benchmark index. The outstanding market capitalisation was around £3.86 billion, with a dividend yield of 5.03 per cent.

Growth Prospects and Risks Assessment

The company is in a good position to take advantage of the strong film slate ahead, helped by continued investment in the UK and Rest of the World and diversified cinema assets. Following the acquisition of Regal Entertainment Group, 2018 was a landmark year for the group, as cost synergies were not only higher than initially expected but were also delivered at a faster pace.

The company looks to share best practice amongst its teams on both sides of the Atlantic in everything it does and seeks to draw on the skills and expertise of Regal. To enhance the cinema experience and thus earnings, the assets are growing and continually being upgraded. The company plans to settle cash income and expenditure in local currency to mitigate foreign exchange risk as the group operates in ten countries, leaving it exposed to exchange rate fluctuations. Diversification has also resulted in tax uncertainties, which can have a potential impact on the future tax rate.

Conclusion

The company's high-quality financials are the result of strong cash generation efficiency, attractive performance but with a risk of declining consumer’s discretionary expenditure. The company’s extensive theatre network enables it to serve a wide customer base. Based on the decent prospects and supported by valuation done using the above two methods, we have given a “BUY” recommendation at the current price of GBX 249.80 (as on 24 June 2019) with low double-digit upside potential based on 7.44x NTM EV/EBITDA (approx.) on FY19E EBITDA (approx.) and 12.10x NTM Price/Earnings Value (approx.) on FY19E earnings per share (approx.).
 
*The buy recommendation is valid for the current price as covered in the report (as on June-24-19).

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