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The valuation is compelling but the risks are high
Thursday 21 Feb 2019 Author: Daniel Coatsworth

Cineworld (CINE) 260.6p

Loss to date: 1.4%

Original entry point: Buy at 264.4p, 3 May 2018

Shares in Cineworld (CINE) are currently sitting just below the point at which we said to buy last May. This is frustrating as the business has issued plenty of good news including a reassuring trading update last month.

Investment bank Berenberg says there are six reasons why the shares deserve another look. These are: a refurbishment programme helping to make sites more attractive; synergies from buying Regal Entertainment in the US; hopes that high levels of debt will be rapidly paid down; a strong movie slate in 2019; ongoing growth in the cinema market; and a cheap valuation.

Cineworld currently trades on 7.4 times 2019’s forecast EV/EBITDA (enterprise value-to-earnings before interest, tax, depreciation and amortisation), which is the lower end of its historical range according to Berenberg.

The shares are cheap because the market is primarily worried about the excessive borrowing levels – net debt was forecast to be $3.79bn at the end of 2018, more than four times EBITDA.

Ongoing reduction in debt will theoretically make the equity worth more, thereby driving a re-rating in the share price.

SHARES SAYS: This is a great business yet the investment case remains high-risk due to the elevated debt levels. Anyone comfortable with the risks should buy the shares as a long-term holding.

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