Overview
Cineworld Group PLC (CINE) is a London, United Kingdom-headquartered international operator of the cinema chain. The group is the only company listed on the London Stock Exchange, which is in the cinema business, and 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 and completed the acquisition of Regal Entertainment Group in 2018. In May 2007, the group was listed on the London Stock Exchange, and through a series of acquisitions, it has become one of the cinema business in the world. As at 30 June 2019, the group boasts 9,494 screens in 786 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 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 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 includes the cinema chain brand Yes Planet and Rav-Chen in Israel and Cinema City in Central and Eastern European countries, and includes the operations of Israel, Slovakia, Bulgaria, Czech Republic, Hungary, Romania and Poland; and the US includes the three cinema chain brands Regal, United Artists and Edwards Theatres.

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. Of the combined cash consideration of $556.3 million from this transaction with EPR Properties and the sale and leaseback of 17 US-based cinemas announced earlier, half was returned to shareholders by way of a special dividend, which was paid on 5 July 2019.

Top Shareholders

 
(Source: Thomson Reuters)

Financial Highlights (H1 2019 ended 30^th June, in $m)

 
(Source: Company Filings)

In the first half ended 30 June 2019, due to the difference in timing of major releases year on year, total admissions declined by 14.4% to 136.0 million on a pro-forma basis. On a statutory basis, where Regal was only included for four months, revenue increased by 15.5% compared with the prior year, while total revenue for the period was $2,151.2 million, which reflected a decrease of 11.1% on a pro-forma constant currency basis. Box office, which is a function of the ticket price per admission and the number of admissions and additionally includes membership schemes, is the principal revenue stream for the company as it made up 59.0% (H1 2018: 61.6%) of total revenue. It rose by 10.7% on a statutory basis but declined by 14.9% on pro-forma constant currency basis. Retail sales of food and drink for consumption within cinemas is the second most significant source of revenue as it accounted for 29.0% (H1 2018: 27.9%) of total revenue in the period, and registered a growth of 20.6% on a statutory basis, but decreased by 7.7% on pro-forma constant currency basis. As a result of the additional two months contribution from Regal in 2019 compared to H1 2018 and adoption of IFRS 16 on 1 January 2019, the adjusted EBITDA increased to $758.6 million (H1 2018: $413.6 million), while on a statutory basis adjusted EBITDA increased by 18.1% to $488.5 million (H1 2018: $413.6 million). Gross profit during the period rose from $451.4 million in H1 2018 to $794.6 million in the current period, while operating profit at $389.2 million was 87.8% higher than the prior period (H1 2018: $207.2 million). As the finance expense of $263.2 million (H1 2018: $92.6 million) increased mainly due to the adoption of IFRS 16, statutory profit before tax declined to $139.7 million in H1 2019 from $160.2 million in H1 2018, while profit before tax under IAS 17 was reported at $251.7 million. Adjusted profit before tax on statutory basis declined to $156.1 million from $190.2 million in H1 2018 and under IAS 17, it was reported at $202.0 million. Profit after tax under IAS 17 was reported at $200.8 million, and statutory profit after tax declined to $117.4 million in H1 2019 from $128.4 million in H1 2018. Adjusted profit after tax on statutory basis declined to $128.6 million from $152.4 million in H1 2018 and under IAS 17, it was reported at $162.5 million. Adjusted diluted earnings per share were 9.4c (H1 2018: 13.1c), and basic earnings per share amounted to 8.6c (H1 2018: 11.1c). Net debt of $7,011.3 million at the period end was higher than at 31 December 2018 by $3,278.1 million and capital expenditure during the period was $183.5 million (H1 2018: $73.8 million), while net cash generated from operations in the period was $589.4 million.

Segmental Analysis

 
(Source: Company Filings)

In the US segment, box office admissions and revenue declined by 18.5% and 17.9% respectively on a pro-forma basis, while retail revenue decreased by 9.9% from the prior period on a pro-forma basis, resulting in a 13.8% fall in revenue to $1,613.9 million. On pro-forma basis, the adjusted EBITDA decreased by 12.7%, and adjusted EBITDA excluding IFRS 16 impact was $385.0 million in the period, an increase of 28.0%.

In the UK and Ireland, box office revenue decreased by 8.8% on a constant-currency basis, and Box office admissions decreased by 8.2% during the period, while retail revenue decreased by 3.3% from the prior period on a constant-currency basis. This resulted in a 5.2% decline in revenue in constant currency basis to $316.4 million. Adjusted EBITDA excluding IFRS 16 impact was $50.9 million in the period, a drop of 11.9%.

In the Rest of the World Revenue segment, box office revenue increased by 1.8% as compared to the prior period on a constant currency basis while box office admissions decreased by 1.3%, with an increase of 7.4% on a constant currency basis in retail spend per person to $2.60 (2018: $2.42), amounting to $59.3 million.

Financial Ratios


 (Source: Thomson Reuters)

Although the profitability margins of the group are less than the industry, they have risen over the past couple of years and are gradually closing the gap. Impressive growth was recorded over the last year as well. However, the liquidity position has deteriorated. Recent acquisitions have led to an increase in the leverage of the group, as seen in the rise in the debt/equity ratio, which was more than the last year and above the industry’s median. The asset turnover ratio was lower than the industry, suggesting that the group can benefit by utilising its resources more effectively.

Valuation Methodology
Method 1:Price/Cash Flow Multiple Approach (NTM)



To compare CINE with its peers, Price/Cash Flow multiple has been used. The peers are AMC Entertainment Holdings Inc(NTM Price/Cash Flow was 3.91), Cineplex Inc(NTM Price/Cash Flow was 4.20), National CineMedia Inc(NTM Price/Cash Flow was 4.42),Marston's PLC(NTM Price/Cash Flow was 4.56),Imax Corp(NTM Price/Cash Flow was 7.35), and Cinemark Holdings Inc(NTM Price/Cash Flow was 7.47). The median of Price/Cash Flow (NTM) of the company’s peers was 4.49x (approx.).

Method 2: EV/SalesMultiple Approach (NTM)
 


To compare CINE with its peers, EV/Sales multiple has been used. The peers are Restaurant Group PLC(NTM EV/Sales was 7.00), AMC Entertainment Holdings Inc(NTM EV/Sales was 5.10), William Hill PLC(NTM EV/Sales was 3.79),Marston's PLC(NTM EV/Sales was 5.26),Cineplex Inc(NTM EV/Sales was 5.53), and Imax Corp (NTM EV/Sales was 5.66). The median of EV/Sales (NTM) of the company’s peers was 1.65x (approx.).

Share Price Commentary


Daily Chart as at 14-October-19, before the market closed (Source: Thomson Reuters)

On 14 October 2019, at the time of writing (before the market closed, at 9:15 am GMT), CINE shares were trading at GBX 218.4, down by 2.41 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 303.99/GBX 206.00. The company's stock beta was 0.83, reflecting less volatility as compared to the benchmark index. The outstanding market capitalisation was around £3.02 billion with a dividend yield of 5.98 per cent.

Growth Prospects and Risks Assessment

The company reported that trading for the current full year remained in line with its expectations and it would maintain historical dividend payout of 55% adjusted EPS pre-IFRS 16 impact, and net capital expenditure remained unchanged and is expected to be approximately $300 million in 2019. During the current period, by paying $550.0 million on the USD term loan, the company was able to further strengthen its balance sheet, helped by the proceeds from the sale and leaseback transactions and steady cash flow from operations. Investing in technology and improvement of customer experience continues to be a key pillar of its strategy and the company continues to focus on generating further cost savings as well as develop its long-term refurbishment plans in the United States. 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.

However, lack of access or availability of high quality, diverse and well-publicised movie product can severely impact the financials of the group, as it would have a direct impact on cinema attendance and, therefore, box office revenue for the company may decline. It is also under pressure to maintain and operate well run and cost-effective cinemas, which would further increase as the competition increases. Although it is still early, cinema owners might expect increased competition from streaming services as well, which can impact the long-term operations.

Conclusion

Over the last four years, the revenue of the group in the first half of financial year has risen by a CAGR of 43.93% while gross profit rose by 54.68% and operating income was up by 55.42%, suggesting improved efficiency. Net income also grew by a CAGR of 20.22%, indicating strong cash generation efficiency and attractive performance.

Based on the decent prospects, and supported by valuation undertaken using the above two methods, we have given a “BUY” recommendation at the current  price of GBX 218.40 (as on 14 October 2019, before the market close) with low double-digit upside potential based on 4.49x NTM Price/Cash Flow (approx.) on FY19E cash flow per share (approx.) and 1.65x NTM EV/Sales (approx.) on FY19E Sales (approx.).
 
*All forecasted figures and Peer information have been taken from Thomson Reuters.

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