The world’s second-biggest cinema operator, Cineworld (LSE:CINE) is in danger of going to zero. The firm has also closed all of its 787 outlets across 10 countries as the coronavirus crisis worsens.
However, you would not know it from today’s price action. The company’s shares gained 40% to retake 58p at time of writing at mid-morning on Tuesday 7 April, before sinking slightly to 53p by noon. This is a quite incredible turnaround from a multi-year low at close of play on Friday 3 April at 36.4p.
The FTSE 250-listed multinational told the market in an RNS it was suspending directors’ pay and stopping planned 2019 and 2020 quarterly dividends of 4.25c per share.
It is the hope that gets you
In normal times, suspended dividends are a herald for profit warnings down the line, and generally a sign to get the hell out, but now they seem like sensible and prudent cash preservation.
At a time when so many have lost so much, traders are juiced up on hopium and seizing upon anything that might signal a return to normality.
So what is going on? Investors are piling into riskier assets with news rippling through markets that the worst of the pandemic might be hitting a peak. The pace of death rates in Europe, mostly in Italy and Spain, have fallen back from recent high points over the course of the last three or four days. Still, 700 people died in Spain yesterday, according to the country’s public health authority, and 636 passed away in Italy from coronavirus.
The most optimistic investors believe markets are looking 3 to 6 months ahead and say that this better news is starting to be priced in. Certainly, from the 18,0000 the Dow Jones Industrial Average was sitting at on 19 March, a rise back north of 22,000 looks like nothing short of a miracle.
As we explained yesterday, what exactly is and is not priced in is an avenue for fierce debate among retail investors.
What the hell just happened
The massive debt pile accrued by Cineworld’s aggressive takeover measures raised eyebrows even in pre-coronavirus times. With most of the Western world and its cinema-going public now confined to quarters, these decisions start to look more suicidal than savvy.
Cineworld has $3.5 billion in debt from big plans to absorb its major rivals. And just as it starts to pay off the refinancing for its £2.4 billion 2018 takeover of Regal Cinemas, CFO Nisan Cohen said the company would forge ahead with another £1.3 billion in spending to buy out its Canadian rival Cineplex (TSE:GCX). He said on 12 March: “There is no changing the plan.”
The Cineplex deal is under the microscope both inside and outside the company now, not least because the deal lead Cineworld to take on £1.8 billion in additional financing.
A 9 March RNS disclosed that Cineworld’s largest shareholder Global City Theatres sold off 108 million shares, 7.9% of the total issued share capital, for £116 million. This was done to refinance a margin loan.
Cineworld bosses announced on the eve of Italy’s lockdown that if the US or UK were to impose the same shelter-in-place social distancing measures, the company could go bust inside three months. The same day also saw it warn that it could breach the terms of its debt in a worst-case coronavirus scenario. In typical RNS language this was worded as “the existence of a material uncertainty which may cast significant doubt about the group’s ability to continue as a going concern.”
Reuters also reported on Tuesday 7 April that Refinitiv Eikon data shows CINE’s combined credit score at 1. This is a measure of how likely a company is to default on its debt in the next year. A score of 100 is ‘very unlikely’. 1 is ‘highly likely’.
Now bosses now face a desperate race to conserve any and all available cash by slashing spending.
75% of Cineworld’s revenue comes from America. With most major cities now shut down, and some states two weeks behind the curve of the biggest coronavirus outbreak in New York, I see little place for optimism. That is not even to mention that servicing its gargantuan loans will be a Herculean task.
Most investors with half a brain can see that companies with unsustainable debt piles will be the first to go under in this new post-coronavirus economy.
The first of the UK’s worst — Debenhams — has already called in the administrators, putting 20,000 jobs at risk. Despite the short-term spike I’d bet the farm that Cineworld will follow.