Cineworld – three monsters standing in the way of the cinema’s recovery

Cineworld – three monsters standing in the way of the cinema’s recovery

Speaking to Third Bridge’s Senior Sector Analyst, Harry Barnick, we were able to pinpoint the three main challenges cinema giant Cineworld (LON:CINE) will face going forwards, ahead of the publication of its results on Thursday.

Not able to get people to the box office

First, Mr Barnick points to cinema attendance, limited by both health and safety, and a shortage of big releases by film studios. On the former concern, Barnick stated that with cinemas being constrained by a two-metre social distancing rule, they would only be able to achieve 30% of their maximum capacity. With a one-metre rule in place, they can fill up to half their pre-Covid max capacity levels.

However, he also thinks that constraints won’t actually be a huge issue, as average capacity utilisation pre-pandemic was below 20%, and up to 65-70% at peak times. As far as sentiment for cinema reopenings is concerned, a US poll indicated that 33% of people were willing to return to cinemas instantly, while up to 45% said they were slightly hesitant, and 25% said they were too anxious to even consider the idea. With this in mind, having 30-50% of capacity available will likely mean cinemas are able to cater to whatever demand there is.

The bigger issue facing attendance, however, is the slim pickings for the 2020 release slate. With Wonderwoman having been postponed for the sixth time the week before last, Top Gun pushed back until 2021 and the Avatar sequel being moved from 2021 to 2022, Barnick thinks the slate could be down 40-45%, which will inevitably damage attendance. The exhibitor reopening schedule intentionally coincided with the launch of Tenet, and while Cineworld and its peers might also benefit from the launch of family film, Soul, in November, the pipeline for the rest of 2020 is fairly blank – meaning there will be few chances to generate momentum going into 2021.

As far as geographical disparity in box office recovery is concerned, Barnick says the main disparity is when cinemas reopened, with mainland European cinemas starting up before their UK and US counterparts. While showing primarily old releases, German cinemas began their recovery earlier than their UK equivalents, which does little for Cineworld, seeing as most of their sites are in the UK and US.

Cash, or lack thereof

Cineworld’s second dilemma, much like any cinema at the moment, is its shortage of cash and ample debt. The issue here is that rather than declining, costs are actually likely to rise going forwards. First, and less inevitably, because cinemas might invest in new ways to add value to the cinema experience versus online viewing. Then secondly, and more inevitably, cinemas will have to invest in expanding their cleaning and hygiene practices, with more regular cleaning procedures likely to impact a company’s cost line.

The main issue as far as cash is concerned, though, is the lack of potential to sell parts of the Cineworld portfolio in order to increase liquidity. The reason for this is that most of the US Cineworld (Regal) estate has already undergone a ‘fairly aggressive’ sale and lease-back agreement drive in order to increase liquidity. In the UK, the majority of the company’s sites are leasehold, and therefore cash generating potential is limited.

Despite the lack of opportunity to generate new cash from its sites, though, the company might still opt to save cash by reducing the size of its estate, with Barnick anticipating that Cineworld might reduce its UK estate by 10-15%.

The key issue as far as cinema sites is concerned, he says, is the risk of previously-growing independent operators folding. From an M&A perspective, Barnick thinks that, driven by the recent abolition of the Paramount Consent Decrees, streaming services like Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) might be interested in picking up the estates of ailing independent exhibitors via bolt-on acquisitions. The reason they’d do this is to diversify their distribution streams and attract high profile filmmakers, who previously might have resisted releasing new films directly onto an online streaming service. Should such developments come to fruition, online services would not only compete with the cinema industry, but would compete with pureplay cinemas, for the cinema industry.

(Online) content is king

The third major concern for cinemas like Cineworld is the seemingly unstoppable rise of premium video on demand (PVOD), with not only streaming sites such as Amazon and Netflix, but studios starting their own PVOD platforms, such as Disney Plus.

The rise of these PVOD platforms are accompanied by two key concerns. First, that studios such as Disney (NYSE:DIS) forgo theatre releases, and attract people towards their services by reserving high profile releases exclusively for their users. This has been seen with the revival of Mulan skipping cinema screens and being released directly onto Disney Plus, as well as previously adored franchises – such as Star Wars and Lord of the Rings – being taken away from the big screen and turned into rolling series formats on Disney Plus and Amazon Prime respectively.

The second structural concern is the shortening of the theatrical window. While Disney has somewhat ironically said they’ll respect the theatrical window, the AMC-Universal deal will see the window shortened from 75-90 days, to just 17 days. This massive gouge out of films being reserved for cinema viewership presents the real possibility of seismically changing the way we consume film content. By shortening the theatrical window to such an extent, cinemas will have to find a way of stopping people from thinking, ‘well, we’ll get it online in two-ish weeks’.

The Cineworld outlook

How much these considerations will effect the upcoming Cineworld results is pretty self-intuitive. With Barnick stating that UK cinemas are expecting a market-wide reduction of 45-50% in attendance year-on-year – from 170 million in 2019, to between 80-100 million in 2020 – and lockdown only pumping up the POVD boom, he says the outlook for the remainder of 2020 is ‘pretty bleak’. As far as investors are concerned, the Cineworld debt load and efforts to save cash means they are unlikely to reinstate their dividend, having initially cancelled it back in April.

One positive note to finish on, is that 2020 was already expected to be a fairly muted year as far as big releases were concerned. Also, with all things being well, the release of the new James Bond title could provide a revenue boost and string momentum going into 2021, and a year of better things to come (we hope).

To see the full interview with Harry Barnick, take a look at our Cineworld podcast.