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Cineworld’s blockbuster year

Published: 08:42 22 Mar 2016 GMT

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Cineworld’s blockbuster year

Cineworld opened a record 18 new cinemas last year taking its estate to 221 sites with 2,011 screens.  The box office performance was also robust with pro forma admissions up by 6.5% to 93.6m.  Looking ahead and Cineworld is set to increase the number of cinema screens by almost a quarter over the next four years.

Last year saw a blockbuster performance at the UK Box Office revenue up by 17.3% to a record £1.24bn.  Box Office revenue does increase over time, given ticket price inflation, but this was nevertheless a strong result. 

UK inema admissions increased by 9% last year to 171.9m following a fall of 2.4% in 2014 and 1.6% in 2013.  The 2015 movie releases driving the performance were Star Wars: The Force Awakens, Spectre and Jurassic World.

The Force Awakens is now the biggest ever box office hit in the UK with £122.6m of revenue at the end of February.  Spectre is the third biggest ever UK box office revenue generator at £94.75m and Jurassic World is the tenth highest at £64.2m.   

Top ten all-time films by UK box office revenue

Source: UK Cinema Association

This backdrop meant for robust trading at Cineworld, which is the largest cinema chain in the UK.  The company is also the second largest Cinema chain in Europe due to the combination with Cinema City on 28 February 2014.

Cinema City was founded in 1929 by the Greidinger family and is focused on Central & Eastern Europe (CEE) and Israel.  The CEE countries are less mature in terms of cinema penetration than the UK and have greater growth potential.

Cineworld’s cinema admissions by country in 2015

Source: Cineworld investor presentation

Cineworld’s cinema admissions in the UK & Ireland were 50.9m in 2015 versus 42.7m in CEE & Israel.  The group generated 62% of its EBITDA profit in 2015 from the UK & Ireland with the remainder coming from CEE & Israel. 

The EBITDA margin in the UK & Ireland was 20.5% last year while in CEE & Israel it came in at 24.8%.  The higher profit margin in CEE & Israel suggests that  expansion in Central & Eastern Europe will be profitable.

Selling the cinema experience

Cinemas compete for consumer leisure spending by offering a night out full of Hollywood entertainment and escapism.  Upstart rivals like Netflix are “in the home” services and do not feature the latest film releases.

Accordingly, the cinema industry should be able to hold its own against the new on-demand competition.  Cineworld, for one, has also been investing in the cinema experience it offers so as to remain relevant.

Innovations recently launched in the UK include 4DX, which is focused on enhancing action movies.  The “4D” experience mimics the onscreen action and includes moving seats, wind, water, fog and scent. 

Cineworld opened three new IMAX cinemas last year bringing the total number it operates to 28.  Both the IMAX movie experience and 4DX offer a unique selling point for cinemas versus watching films in the home.

The IMAX movie experience

Source: Cineworld investor presentation

Another feature recently launched in the UK is the “VIP experience” with separate auditoriums.  The service opened in Sheffield last year and includes superior seating and a premium food and drink offering.

To improve the quality of its estate the group redeveloped six sites last year with enhancements in areas such as screen quality.  The company also has 17 Starbucks franchises in its UK sites with the coffee chain proving to be a success.

Movie line-up

The film line-up is a key factor for the success of cinema groups and there appears to be a strong slate 2016 and 2017.  Both years will see a new Star Wars film released in December and there is a strong set of family films in the offing.

Recent releases include Deadpool, which was the strongest performer at the UK box office in February and Kung Fu Panda 3.  Upcoming releases include Star Wars Rouge One, Angry Birds, Batman v Superman, The BFG and Ice Age 5.

Select movie releases in 2016

Source: Cineworld investor presentation

Cineworld’s CEO, Mooky Greidinger, stated alongside full year results that: “I am happy to say that when we look forward, we can do so with optimism…Hollywood looks more committed than ever to quality productions.”

“Our upcoming UK cinemas will continue to be in the “new generation” style with, a large number of screens and a wide range of features to enable us to give our customers a great experience.”

Two new UK cinemas opened in 2015

Source: Cineworld investor presentation

Cinema World’s combination with Cinema City

Cineworld’s combined with Cinema City on 28 February 2014 and as such it features for only 44 weeks in fiscal 2014.  The statutory growth for 2015 is therefore in part driven by the combination.

The deal has also seen Cinema City’s management take control with Mooky Greidinger CEO and his brother, Israel, the Deputy CEO.  The Greidinger family currently own 29% of Cineworld through their Global City investment vehicle.

Cineworld’s former CEO left at the time of the combination and Cineworld’s former CFO left in June 2015.  The company is planning to appoint Nishan Cohen, who comes from the Cinema City business, as CFO in a year’s time.

Investors had expected that any new CFO appointment would be from a UK plc experienced finance director i.e. independent from Cinema City.  As such corporate governance at Cineworld has become a cause for concern.

Cineworld growth prospects

Cineworld states that over the next four years it will open 45 new cinemas with 465 screens.  This would increase the number of screens by 23% over the period and therefore represents meaningful growth.

In 2016 the group is planning to open 13 new sites with 121 screens and in 2017 the plan is for 15 site openings with 160 screens.  The majority of the new screens in both years will be in the Central & Eastern European (CEE) countries.

Cineworld expansion in 2016 and 2017: 14% increase in screens

 

Source: Cineworld investor presentation

Performance in 2015

Looking at the performance in 2015 and Cineworld saw a 12.9% increase in admissions in 2015 to 93.6m.  Revenue growth came in at 13.9% to £705.8m with Box Office revenue the main driver generating £451.6m of revenue.

The EBITDA margin increased to 22.7% and the adjusted profit rose by 37.1% to £102.8m.  Adjusted earnings per share increased by 28.7% to 31.4p and the dividend was lifted by 29.6% to 17.5p.

Cineworld’s net debt fell to £245.2m at the end of 2015 from £281.9m at the start of the year.  This pushed the net debt to rolling 12 month EBITDA ratio to 1.6X versus 2.1X at the start of the year.

Cineworld’s headline figures in 2015

Source: Cineworld investor presentation

The headline figures were boosted by the Cinema City combination but the underlying result was still solid.  This is highlighted by the pro forma figures, which assume that Cinema City was part of the group for the whole of 2014.

Pro forma cinema admissions were up by 6.5% in 2015 while pro-forma revenue was up by 12.4%.  The pro forma EBITDA margin increased by 1.4% during the year to 22% and pro forma EBITDA profit rose by 18.5% to £155.3m.

Summary and valuation

The consumer environment in the UK should provide a tailwind for Cineworld in the coming years.  We have seen real wage group recently return for the first time since 2007 and the UK unemployment rate recently fell to a 10-year low.

An additional driver for Cineworld is the expansion in its Cinema estate particularly in Central and Eastern Europe.  Over the next four years the number of cinema screens run by Cineworld is set to increase by 23%.

How Hollywood movies perform at the box office is more difficult to predict but the film slate for 2016 and 2017 appears to be robust.  A new Star Wars film, for example, will be released in both years with the franchise unlikely to falter.

Looking at the valuation and Cineworld is on a forecast P/E for 2016 of 17.2X with a forecast dividend yield of 3.3%.  The forecast P/E falls to 15.6X in 2017 with a 3.6% yield and then 14.3X in 2018 with a 3.9% yield.

While the near-term valuation appears full the medium-term profit and dividend growth on offer is attractive.  Key risks include weak box office admissions and an overexpansion of the cinema industry in Europe.

This report was produced by Fat Prophets Senior Research Analyst, Andrew Latto

 

 

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