October 14, 2020

Cineworld shares ‘Skyfall’

by Tajinder Dhillon.

Cineworld Group (CINE.L) announced the temporary closure of U.S. and U.K. cinemas, which caused share prices to decline 36.2% on October 5th.  According to Reuters, the anticipated upcoming James Bond film “No Time To Die,” which had been postponed from April to November, was pushed back further to April 2021.  The company announced, “Without these new releases, Cineworld cannot provide customers in both the U.S. and the UK… with the breadth of strong commercial films necessary for them to consider coming back to theaters.”

Looking at Cineworld Group from a StarMine perspective, it paints a bleak picture for the company as shown in Exhibit 1.  The benefit of StarMine models is that it quickly informs an investor of an overall picture of a company without having any prior knowledge.  The model scores are ranked from 1-100 with 1 being bearish and 100 being bullish.  From the scores below, we observe the stock price has been in secular decline, sell-side analysts have downgraded estimates, and the company is out of favour with institutional investors as defined by the Smart Holdings model.  As a result, it scores high in the Relative Valuation model as it appears ‘cheap’ compared to its peers on a valuation basis.

Exhibit 1: StarMine Model Scores for Cineworld Group

Source: Refinitiv Eikon.

Find out more about the Refinitiv StarMine suite of proprietary alpha-generating analytics and models spanning sectors, regions, and markets.

While the company may appear cheap, there are further worrying signs from a fundamental and credit risk perspective.  It has a bearish score in the Earnings Quality model, which looks at the sustainability of a company’s earnings through the analysis of accruals, cash flow, and margins.

Cineworld Group has also faced high levels of debt which has led to the company looking at several sources of additional liquidity. The Credit Risk models look at the probability of default (default on bond obligation or bankruptcy) over a 12-month horizon.  Used as a risk mitigation tool, Cineworld Group has a score of 1 when looking at the Combined Credit Risk model, a multi-pronged approach which combines our three stand-alone credit models: SmartRatios, Structural and Text Mining.

Exhibit 2: Credit Risk Combined Model for Cineworld Group

Source: Refinitiv Eikon.

Exhibit 2 highlights Cineworld Group having the lowest decile scores across all three components: Structural Model, Text Mining Model, and SmartRatios Model.  The Combined Credit Risk model generates a probability of default of 3.99%, which is second highest of all European companies with a market capitalization greater than $400 million.

The probability of default (%) is mapped to a StarMine Implied Rating of “CCC-”, which can be compared to traditional rating agencies.  S&P also has marked Cineworld Group with a “CCC-“ rating.  However, if we look at the evolution of rating changes over time, we note a salient observation as shown in Exhibit 3.

Exhibit 3: Combined Credit Risk Score for Cineworld Group

Source: Refinitiv Eikon.

In the graph above, the gold line is the share price, the green line is S&P’s rating, and the blue line is the StarMine Implied Rating.  In February 2020 the blue line (StarMine Implied Rating) starts to aggressively downgrade Cineworld Group seven times from a “BB-” to “CC” within 30 days.  The green line (S&P agency) remains unchanged at a BB- during this same time.  The punch line is that in this example, StarMine provided a signal to investors of possible default/bankruptcy risk well in advance compared to traditional rating agencies. 

The Text Mining Model utilizes a text-based algorithm analysis of company risk by scanning hundreds of documents across news, StreetEvents, filings and research to detect words and “bag of words” which indicate credit risk.  The Text Mining Model also provided a strong signal to investors that there were credit concerns for Cineworld.  In Exhibit 4, we observe news and research documents from March 2020 that demonstrate this in more detail.

Exhibit 4: StarMine Text Mining Model for Cineworld

Source: Refinitiv Eikon.

The StarMine Smart Ratios Credit Risk model provides the longest lead time to investors to spot credit concerns as this model utilizes accounting ratios based on financial statements and analyst estimates. For Cineworld, we observe a state of deteriorating fundamentals as demonstrated by low profitability and liquidity, negative profit margins, and a high degree of leverage.  Users can look at the figures in more detail by visiting the Smart Ratios page within Refinitiv Eikon.

It appears that high leverage exists amongst Cineworld’s peers as shown in Exhibit 5.

Exhibit 5: Long-term Debt/Equity Ratio for Global Theatre Companies

Cineworld has a long-term debt/equity ratio of 640.0% which is the highest among its peers selected in this group.  AMC Entertainment also has a high ratio of 397.2% while Cineplex is not far behind at 380.5%.

Negative Predicted Surprise for Movie Cinemas

Looking at the Predicted Surprise for Cineworld Group shows that it is likely to miss estimates when it reports as shown in Exhibit 6.  The mean estimate is $-0.40 compared to a SmartEstimate of $-0.65, resulting in a Predicted Surprise of -63.4%.  When the Predicted Surprise is greater than 2.0% or less than -2.0%, there is a high probability in accurately predicting the direction of the surprise when a company reports.

Exhibit 6: Predicted Surprise for Cineworld Group

Source: Refinitiv Eikon.

A similar picture is observed in Exhibit 7.  Using the Screener app in Refinitiv Eikon, we can screen for companies in the Movie Theaters & Movie Products industry.  Most companies have a predicted surprise less than -2.0% indicating a high likelihood of missing earnings when they report.  Wanda Film Holding Co has the largest negative surprise at -29.6%.  U.S. operator AMC Entertainment Holdings Inc has a negative surprise of -4.5%.

Exhibit 7: Predicted Surprise for Global Movie Theaters

Source: Refinitiv Eikon.

In Exhibit 7, we also observe bearish sentiment from analysts as indicated by the Analyst Revision Model (ARM) Region Rank.  All companies have an ARM score less than 20, with Canadian operator Cineplex Inc having the lowest score of 1.

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