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Three reasons why you need shares in Cineworld
A very strong 2017 film release schedule, rising spend per customer and progressive earnings underpin a very attractive investment case at Cineworld (CINE).
This is a fantastic business with high quality earnings. It generates lots of cash to self-fund expansion and pay more dividends every year to shareholders. Adjusted pre-tax profit increased by 12.5% in 2016 to £111.4m and the dividend went up by 8.6%.
We are enthused by the film release slate which includes new films in such blockbuster franchises as Star Wars, Fast & The Furious, Despicable Me and Guardians of the Galaxy.
Cinema is very resilient, in our view, and is in demand in both positive and negative economic conditions.
Growth agenda
Cineworld plans to open 13 new cinemas in 2017, roughly half in the UK and the rest in other parts of the world. Investment bank UBS is worried about over-supply of cinema screens in the UK. It says the pace of new screens being added to the UK cinema market is faster than historical levels and claims admissions per screen have been falling since 2009.
‘We believe further screen growth will lead to a reduction in admissions per mature cinema, which risks eroding the profitability of UK cinema chains,’ says the bank.
In response, Cineworld’s chief financial officer Nisan Cohen says: ‘A lot of old cinemas will be closed in the coming years and they will be replaced by new cinemas with modern technology. As for other parts of the world, immature markets like Romania still need regular multiplexes built.’
You need to consider the UK only represents half of Cineworld’s estate (118 sites, 1,042 screens). It also has 108 cinemas with 1,073 screens in other countries such as Poland, Israel, Hungary, Czech Republic and Bulgaria.
Competition from streaming services
Another factor troubling UBS is the rise of home entertainment services like Netflix which continues to enjoy rapid growth in customer numbers.
Cohen argues that people will still want to get out of the house to enjoy leisure activities and that cinema remains an affordable form of entertainment.
He also notes that cinema-goers are spending more in Cineworld’s cinemas as a result of greater numbers of tickets being bought via the internet. ‘They now don’t need to queue up for tickets, which gives them more free time to buy a hot dog and a Coke,’ he says.
‘We’ve also introduced Starbucks areas in our cinemas which are very popular and you can even get a full meal at our VIP sites.’
Investec forecasts 10% pre-tax profit growth in 2017 to £122.6m, rising to £132.1m in 2018. (DC)
Cineworld (CINE) 632p
Stop loss: 443p
Market value: £1.7bn
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