Cube UK Report (25 March 2021) – Cineworld borrows more cash
Good morning, it’s Roland here with today’s Cube Report.
There’s a lot of news on the wires this morning, but I’m going to focus on Cineworld’s 2020 results and liquidity update – i.e. more borrowing.
The world’s second-largest cinema chain is a heavily leveraged ‘reopening stock’ that’s divided opinion over the last year. Cineworld’s share price has been extremely volatile, trading in a 52-week range from 15p to 125p. The shares are at the upper end of this range at the moment, although they’ve fallen sharply at the open this morning.
I’ve long been concerned about debt levels here. This situation can only have worsened over the last year, so I’m keen to see just how bad (or not) things have got.
- Stock data should display here.
|RNS||2020 preliminary results|
|Writer disclosure||No position|
Cineworld’s entire estate of 767 cinemas was closed during the spring of 2020, before reopening briefly in some locations during the summer. All of the firm’s cinemas have been closed again since October, due to delayed major releases and subsequent lockdowns.
We can take it as given last year’s results will be bad – and they are:
- Revenue down 81% to $852m
- Loss before tax of $2,652m
However, I have to admit that cash burn for the year wasn’t as bad as I expected. Cineworld’s net cash outflow from operating activities was $228m.
With US and UK cinemas set for phased reopenings from April and May respectively, revenue may start to flow. But I don’t think Cineworld is out of the woods yet. I’d imagine a return to normal will also see a sharp increase in operational cash outflows, as normal operating costs become payable again.
Net debt was $8.3bn at the end of 2020, up by $0.6bn from December 2019:
- Total liquidity raised in 2020: $810.8m (including some equity warrants)
- Year-end cash balance: $337m (2019: $141m)
- Year-end gross debt: $4,662.7m (2019: $3,619.3m)
- Year-end lease liabilities under IFRS 16: $3,917.7m (2019: $4,197.5m)
Note that gross debt has risen by $1bn. The majority of this matures by 2025, in some cases earlier.
The smaller increase in net debt is the result of a reduction in lease liabilities and a higher cash balance.
The situation isn’t quite as bad as I thought it might be. Cineworld’s management of its net debt appears to reflect the benefits of government furlough programmes and company efforts to conserve cash. These have included rent relief and lease amendments in some cases.
New borrowings: Cineworld has just secured commitments for a $213m convertible bond due 2025, with a 7.5% coupon. I calculate that this increases gross debt to $4,876m and net debt to $8.5bn.
Covenants: Cineworld has obtained leverage covenant waivers until June 2022, but is operating under a minimum liquidity covenant. I’d imagine this explains the latest convertible bond issue — cash outflows when reopening could put pressure on liquidity.
Dilution: the elephant in the room is dilution. Will a rights issue or placing be needed to cut debt to sustainable levels after cinemas have reopened? My suspicion is that this will be necessary, but we don’t know yet.
However, shareholders have already seen some dilution by stealth. In November, the company issued equity warrants equivalent to 11% of the issued share capital. These have a strike price of 41.5p and anti-dilution protection.
Today’s convertible loan may also lead to further dilution — I estimate around 9%, if the bonds reach the conversion price of 128.5p per share.
This takes the total possible dilution to 20%, based on what we know today. Not terrible, but not ideal — it means pre-Covid earnings of 100p per share would be equivalent to 83p per share on a fully diluted basis.
Going concern: Cineworld’s going concern statement is a long, complex and nuanced essay. I’m not going to reproduce it here, but I’d paraphrase it as “fingers crossed, we should scrape through”.
A couple of key points:
- Cineworld expects a $202m cash tax refund under the US CARES act by April
- The group is awaiting judgement in a legal case involving Regal shareholders (a former acquisition). A decision is expected by the end of June. The dissenting shareholders are said to be claiming more than $202m. However, the company says that the terms of November’s $450m loan would prohibit a payout except from an equity raise or new subordinated debt.
The Regal case appears to be an extra risk that Cineworld shareholders could do without. In my view it tilts the odds further towards an equity fundraising at some point after reopening.
The situation at Cineworld is not quite as desperate as I thought it might be. But my view remains that this company has too much leverage and will probably need an equity refinancing. Remember that CINE’s all-time peak annual profit, in 2018, was $284m.
I’ve been following this stock here on Cube since before the pandemic and have been concerned in the past about management’s fondness for leverage. Significant dividend payouts continued even when the cash might have been used to reduce acquisition debt. Now we’re seeing the consequences — Cineworld appears to have very little margin for error.
The equity here doesn’t interest me. Although I’m confident the business will recover, I see significant downside risk for shareholders. At best, I expect a protracted period of sub-par returns as the balance sheet is deleveraged.
I’m afraid that’s all I’ve got time for this morning. Thanks for reading.
As always, I’d love to hear your views on Cineworld or any of today’s other news. Please feel free to leave feedback through the thumbs up or in the comment box below.