Cube Midcap Report (6 March 2020) – Cineworld gets shaken and stirred

Cube Midcap Report (6 March 2020) – Cineworld gets shaken and stirred

Good morning!

Or is it? The FTSE is down over 200 points currently, which is more than 3%.

Stressful times out there.

I’d love to buy more, but I’m already as invested as I can responsibly be.

The featured image reflects the fact that I’m about to discuss Cineworld (CINE), and the fact that current markets make for great viewing (albeit stressful)!

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Ok, on the agenda today we have:

  • Cineworld (CINE)

I can’t see much else that is of interest from today’s RNS. So I might be able to scroll back and look at results from yesterday:

  • Admiral (ADM)
  • GVC Holdings (GVC)

If you have any other requests, please let me know!



Cineworld (CINE)

  • Share price: 112.15p (-8%)
  • Market cap: £1,540 million

Company Update

It’s a Covid-19 update from this large cinema group.

So far, there has been “no material impact” from the virus on cinema admissions.

Following an increase in admissions in the first two months of the year against the same period in the previous year, we continue to see good levels of admissions in all our territories, despite the reported spread of COVID-19.

It’s not all good news, however.

The new Bond film, No Time to Die, has been delayed until November 2020.

Shares in CINE might be dropping as investors wonder about the possibility of delays to other films, too:

“…the studios have advised us that in the countries in which we operate, they currently remain committed to their release schedule for the coming months and remainder of the year.”

Management also mention capex postponement and cost reduction among measures which they could resort to, if the virus continues or gets worse.

And we get some unaudited financial data for FY December 2019:

  • Revenue $4,369 million (this is 1% below the consensus forecast I can see of $4,405 million)
  • Adjusted EBITDA (pre-IFRS 16) $1032 million
  • Net debt $3,479 million (pre-IFRS 16) (slightly worse than the consensus forecast I can see)

My view

Roland and I have covered this stock before – see the archives.

I must put my hands up and say that I got it wrong last August when I thought that prospects for shareholders were decent. The share price at the time was 246p, more than double their current level. The P/E multiple was 9x.

Do I think it’s good value now, at an alleged P/E multiple of 5x?

The valuation is now so low that the market appears to be pricing in financial distress.

At the interim results, published in August, Cineworld reported net debt (excluding leases) of $3.3 billion, a leverage multiple of 3.3x, and reported a clean bill of health in terms of the “going concern” assumption.

But in December, Cineworld announced a (Canadian) C$2.8 billion acquisition, Cineplex. Roland took a good look at it.

That acquisition hasn’t completed yet, and short-sellers are now attacking Cineplex and speculating that it might not go ahead as planned.

Short-sellers have also been looking at Cineworld. At least 8.8% of Cineworld shares are currently sold short (source:

If I was a Cineworld shareholder, I would certainly be nervous about taking on more debt in current conditions.

The good news is that the Cineplex deal hasn’t completed yet. And the vast majority of Cineworld’s existing debt doesn’t have any covenants, other than providing the lenders with financial statements and some financial calculations (source: Annual Report for 2018).

In the absence of covenants, I suspect that Cineworld has a good chance of pulling through. The problem is that nobody knows how long or how damaging the disruption from this virus might be.

In Cineworld’s words:

There can be no certainty as to the future impact of COVID-19. 

Based purely on my experience with previous health scares, I believe that humanity will adapt and learn to cope with this virus, although it might take a few months or in the worst-case scenario, a year.

The contrarian in me wants to go long of stocks such as CINE and cruise operator Carnival (CCL). But I won’t do it unless I am very happy with their survival prospects.

CINE is at peak uncertainty right now – it will be much easier to analyse after the Cineplex deal has been finalised. The best-case scenario for CINE might actually be that the deal is called off.

Here are tweets from the short-seller Hindenburg Research, which is short Cineplex:



Admiral (ADM)

  • Share price: £21.615p (-3.4%)
  • Market cap: £6.35 billion

2019 Results (issued on Thursday, 5th March)

These were fine results:

  • revenue +5%
  • PBT up 10%
  • ROE still at very high levels of over 50%

Admiral offered some nice bonuses for staff, too, which won’t break the bank:

Around 10,000 staff each receive free shares worth up to £3,600 under the employee share scheme based on the full year 2019 results. All staff will also receive a one-off £500 bonus to reflect the Group’s strong performance in 2019.

Ten thousand staff multiplied by £4,100 gives me an estimate of £41 million for the cost of these awards. That’s less than 10% of the PBT figure for the year.

Small gestures like this are often worth it, I think. They are a small price to pay in exchange for lots of goodwill.

CEO comment

“Admiral tends, year after year, to exhibit a relentless forward momentum, which my predecessor described as “going like a freight train”.

“Was 2019 another “freight train” year? 

“Very much so.  In so many ways.  

The CEO, a co-founder of Admiral in 1991, is retiring in 12 months and will be replaced by Milena Mondini.

Mondini is an internal hire who has been with Admiral since 2007. I like these signs of stability.


The CEO’s commentary is refreshingly human, and backs up the Chair’s comments on Admiral having a distinctive “culture” that is embedded across its international operations. The word “culture” appears no fewer than 16 times in this RNS!

But I did love “going like a freight train”.  A freight train – not racy, not glamourous (who needs a glamourous insurance company); but progressing ever onwards with a relentless, implacable forward momentum.

The CEO expands on the use of “freight train” as a metaphor for Admira:

But I did love “going like a freight train”.  A freight train – not racy, not glamourous (who needs a glamourous insurance company); but progressing ever onwards with a relentless, implacable forward momentum.

CFO Review

In the CFO’s review, we are reminded that Admiral’s results are distorted by the Ogden rate, which is an estimate of investment returns used in insurance payouts.

Ogden created a £66 million boost for Admiral’s results in 2018, when the rate changed from negative 0.75% (!) to 0%.

For 2019, Ogden was moved back down to minus 0.25%, hurting Admiral’s results by £33 million.

Despite this £33 million hit, the 2019 group profit result was £47 million better than 2018 (£526 million vs. £479). The underlying growth in profitability seems to be excellent, though the CFO warns us that “the changes in the Ogden rate during the period make meaningful comparison difficult”.

UK motor profit is roaring higher, helped by:

“…unusually high UK motor reserve releases that resulted from improved reserve estimates across a number of years. This in part is due to some ‘unclogging’ of large claims settlements caused by the recent certainty, but also generally much more positive trends on big claims than we expected. Admiral of course is (and I believe always should be) consistently prudent in setting reserves and normally expects significant releases, but 2019 has been well above average (29% v 21% over the previous five years).”

My view

This is another FTSE-100 component which I suspect offers some value at current levels.

The price to book multiple is extremely high (7x) but when you have a very strongly performing insurer such as this, it might be reasonable to focus on earnings (forward P/E is c. 16x).


GVC Holdings (GVC)

  • Share price: 762.4p (-3.5%)
  • Market cap: £4.4 billion

Final Results

These were ok results, ahead of the original expectations, and buttressed by a good trading update:

Trading in the year to date was strong with Group NGR +5% cc and Online NGR +16% cc, both of which have benefitted from strong sports margins in the first two months. This represents a good start to the year and, at this early stage, the Board is confident of delivering EBITDA and operating profit in line with expectations.  

(NGR = net gaming revenue, cc = constant currency rates).

There is no mention of the impending catastrophe from the coronavirus.


The online gaming market continues to evolve at a rapid pace, in particular regulation. This is creating opportunities as well as challenges. We continue to target double digit online revenue growth in the medium term, which we expect to deliver through a combination of underlying market growth and continuing to gain share in key territories and M&A activity. We expect to further expand internationally, entering new markets through a combination of organic (licence applications) and non-organic (acquisitions and strategic partnerships) expansion.

My view

As with William Hill (WMH), I’m biased against the old-fashioned (to my eyes) Ladbrokes/Coral businesses. Parts of the group which look more attractive are SportingbetMGM Resorts and Partypoker. There are lots of moving parts, making it hard to comprehend the total.



I’m going to call it a wrap there for the week.

Thanks very much for dropping by, and have a great weekend. I suppose we’ll all be trying not to look at our portfolio valuations!





Wordpress (2)
  • comment-avatar

    “CINE is at peak uncertainty right now” – not sure I agree there Graham (and same goes for Carnival.

    “More than 2,000 people were stranded on the Grand Princess cruise ship after it was barred from returning to port in San Francisco because at least 35 people aboard developed flu-like symptoms” – Reuters. I think America is only just coming to terms with what all this might mean – irrespective of discounts to be offered, I can’t see many people booking cruises, in particular, for the rest of this year and what percentage of capacity do the cruise companies have to operate at to break even?? Same goes for cinemas – especially nowadays when so many of us are Netflix/Amazon Prime subscribers anyway.

    Capitulation still a little way off I think.

    • comment-avatar

      Laughton – I get what you are saying with the virus still spreading rapidly. CINE is in a special situation with the proposed acquisition, which could change its size and balance sheet considerably! But yes, the ramifications and severity of the virus could become even greater and more worrying for the market. G

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