Short-sellers have pushed bets against Cineworld to a near record high, as the world’s second-largest cinema operator grapples with high debt and concern about the impact of coronavirus on box office attendance.
In an unscheduled update to the stock market on Friday, Cineworld said it had not seen “any material impact” on cinema admissions since the outbreak of the disease. However its shares have fallen 47 per cent since the beginning of the year.
The proportion of Cineworld stock out on loan — a proxy for short interest in the company — has increased steadily over the past eight months and is now more than 20 per cent, according to data from IHS Markit.
“Superficially all is well. Headline revenue and profit is up [and] dividends are rising,” said Robert Medd, an analyst at Bucephalus Research Partnership, which advises institutional investors including short funds that benefit when prices fall. “The reality is very different . . . cash flow is limited and real liabilities have ballooned.”
Cineworld announced plans to buy indebted Canadian cinema chain Cineplex in a $2bn deal last December.
Before this the group had net debt of $3.3bn — about 4.7 times earnings before interest, tax, depreciation and amortisation — which it aimed to cut to less than three times ebitda by the end of 2020. It extended that period to the end of 2021 when it announced the debt-financed acquisition.
Alongside the statement on coronavirus the company also released unaudited results for 2019. It expects revenues to be $4.4bn for 2019, marginally behind consensus forecasts, and adjusted ebitda of just over $1bn.
Net debt, excluding future payments due for cinema leases, was $3.5bn.
“Because of the deal . . . and people painting structural pictures of decline in the industry, it makes it a relatively easy short,” said Richard Marwood, a senior fund manager at Royal London, Cineworld’s sixth-largest shareholder. “At the end of the day the debt is the area they need to address.”
Fears that the group is over-leveraging itself have been compounded by increasing pressure on cinemas from streaming services such as Netflix and Amazon Prime.
Meanwhile Hollywood has started to feel the effects of coronavirus with the shutdown of cinemas across China, the world’s second-largest cinema market, and the postponement of the latest James Bond film until November. The Bond film, Daniel Craig’s last outing as the spy, was due to be released next month.
Natasha Brilliant, an analyst at Citi, said the coronavirus posed a “meaningful risk to earnings” and that US cinema admissions could be down as much as 20 per cent this year.
Cineworld said on Friday that it had seen “good levels” of attendance in recent weeks and had been assured by the studios that they “remain committed to their release schedule for the coming months and remainder of the year”.