Everyone loves a good blockbuster — a Star Wars or Marvel epic that wipes away our daily worries. The challenge for Cineworld is that not everyone wants to watch it in a cinema.
What to do about the rise of streaming services such as those offered by Netflix and Amazon is one of the big questions being asked of the traditional operators of the world’s commercial movie screens.
The answer that Cineworld and its like give is that if they make cinema-going an experience to savour — with good food and drink alongside a chosen film — then the whole episode becomes viable, and more profitable. In short, there should be room for both the new and the old.
A more specific problem for Cineworld, which has chosen to further counter the threat of the streamers by bulking up through acquisitions, is the level of its debts, getting on for a worrying four times profits before tax and other items after its most recent deal to buy Cineplex of Canada.
It is scepticism on both of these two counts that has prompted hedge funds to place large bets against Cineworld’s share price. The group is among the most shorted companies on the stock market, with positions against it accounting for about 14.2 per cent of its market value, according to Short Tracker.
Cineworld began as a single outlet in Stevenage in 1995 and listed on the stock market in 2007. It has grown to become the world’s second-largest cinema operator, behind AMC Theatres, operating 9,494 screens across 786 sites in ten countries. It also owns the Picturehouse chain in the UK.
Central to its latter-day strategy are Moshe and Israel Greidinger, two brothers who joined in 2014 when Cineworld took over Cinema City, which they owned. Moshe, 67, is chief executive and Israel, 58, is his deputy and together they own 28 per cent of the company’s shares.
Their decisions have certainly been bold. In late 2017 they spent £2.7 billion buying Regal, America’s second-largest cinema chain, taking on a further $2.2 billion in debts and paying for some of it through a £1.7 billion rights issue.
Many of Regal’s 561 sites were in need of an upgrade, meaning that as well as servicing its debts, Cineworld has had to lay out hundreds of millions in investment. Then, last month, the brothers again took shareholders by surprise, agreeing to buy Cineplex for about £1.6 billion, including debts. The chain, which has 165 cinemas and 1,695 screens is not in need of a Regal-style makeover, but the takeover took Cineworld’s net debts excluding leases to an eye-watering $5.7 billion.
That’s not to knock the acquisition per se, which doesn’t look expensive, has plenty of scope for savings — roughly $130 million a year by the end of 2021 — and is immediately beneficial to Cineworld’s earnings.
In its favour, Cineworld generates a lot of cash and is targeting reducing its leverage to more like three times profits before adjustments by the end of next year, though in truth that is still too high.
The transaction would probably have been received more favourably had it not been unleashed on investors just a fortnight after the company issued a profits warning, albeit a gentle one. It blamed falling box office revenues after the release of several highly anticipated films was pushed into this year.
Cineworld’s shares, admittedly volatile, have lost 23.8 per cent since February, when this column recommended holding them, amid shareholder worries about earnings growth. Shares, down 8p or 3.8 per cent at 202½p, are cheap, valued at just 7.3 times consensus forecast earnings for a yield of nearly 7.4 per cent. The ride might be a psycho-thriller, but investors should stay on.
Advice Hold
Why As long as it can reduce debts it has a viable future and is very attractively valued
Yougov
It would be of little surprise if a straw poll concluded that the public had had their fill of expressing their political will.
The 2016 Brexit vote, the surprise decline in Theresa May’s majority in 2017 and the election that installed Boris Johnson in Downing Street last month have provided enough drama for a TV series box set.
Might they similarly have had enough of the pollsters, particularly after so many wildly misread the public mood in two of these three previous election ballots? Canvassing public opinion is meat and drink to what Yougov does.
While it accurately predicted the outcome of the 2017 general election, political polling accounts for less than 3 per cent of its revenues. It is, however, a central part of raising its profile among prospective customers.
Yougov was founded 20 years ago by Stephan Shakespeare, 62, who remains its chief executive. Based in the UK and with operations across the continent, North America, the Middle East and Asia, it is listed on London’s Aim market with a valuation of £705.5 million. Starting in 2014, the company has been shifting its business model. Previously built around ad hoc, customised market research, Yougov now has a “panel” of more than eight million people worldwide from which it draws data and insight, available to its customers in as close to real time as possible.
It collects more than 40 per cent of its revenues through custom-made research but the internet-driven products and services it is building are growing at a rapid rate.
The growth of revenues, profits — and the share price — is impressive, driven by the new model. Pre-tax profits for the year to the end of July were up 65 per cent on a 17 per cent increase in revenues, helped by higher margins. The shares, flat at 655p yesterday, have surged by 60.7 per cent over the past 12 months and are more than four times higher than five years ago.
Shareholders have clearly not had enough of this particular pollster, but their eagerness has given Yougov a very high valuation. The shares trade at just under 57 times Peel Hunt’s forecast earnings, with a dividend yield of just 0.4 per cent. That kind of rating is not for this observer.
Advice Avoid
Why High quality, digitally-driven business but too costly
