It’s not often we get both a successful World Cup and a heatwave to enjoy over the summer. But not everyone necessarily thinks these are unconditionally good things. Take the directors of Cineworld.
With the rival attractions of the football in Russia – particularly after England’s better than expected performance – and now the sunny weather, there is less incentive to sit in a darkened room watching a blockbuster movie.
Between the start of June and the middle of July, total UK box office sales slumped 19% compared with the same period last year. It was not just the weather and the football. Some of the expected blockbusters proved disappointing. For all the success of Avengers: Infinity War, Black Panther and Jurassic World: Fallen Kingdom, there were notable underperformers in the shape of the Star Wars spin-off Solo and Dwayne Johnson’s big-budget outing, Skyscraper.
So when Cineworld reports its half-year results on Thursday, its figures for the UK are likely to show little growth in revenues and profits. Indeed its update in May for the first quarter showed a 2.1% fall in revenues in the UK and Ireland.
Fortunately Cineworld is not exactly dependent on the UK, following a transformational deal completed in March. It paid around £2.5bn for the US chain Regal, making it the second-biggest cinema chain in the world. Around 70% of its revenues now come from the US, and the box office there has performed well in recent weeks.
Analysts at Barclays said it was too soon to judge the long-term merits of the Regal deal, but the timing looked shrewd: “Management took a risk acquiring Regal after weak US box office in the third quarter of 2017 (down 14% year on year) when concerns over the threat from alternative content and a shorter release window were elevated. After a 10% rise in US box-office revenue in the first half, with a record second quarter (up 23% year on year), the third quarter 2017 box office decline looks like the ebb and flow of the film release schedule, rather than structural decline. Revenue volatility should continue, but Cineworld will soon be investing in the Regal estate. We believe this will help market share gains and drive [earnings] higher, after the initial synergy benefits have been realised.”
Investec analysts are also positive about the deal, and hope for some good news in Thursday’s update. In a buy note they said: “The core to our investment thesis is management’s ability to improve the quality and performance of Regal’s theatres and realise combination benefits. We are hoping for positive early impressions on Regal and some quick wins (refurbishments, insourced online ticket sales and combination benefits), though we think it is too early for upgraded guidance.”
A solid pipeline of releases – Incredibles 2, Mamma Mia! Here We Go Again and the forthcoming Fantastic Beasts and Mary Poppins Returns – should help boost earnings for the rest of the year.
The company has also been refurbishing its sites, and following a recent broker visit to the revamped Cineworld in London’s Leicester Square, analysts at Stifel said: “Cineworld was in a confident mood with regard to the prospects for Regal and the film slate for the second-half year.”
Barclays is forecasting half-year earnings of £262m including a first-time contribution of £174m from Regal, up from £84m this time last year. For the full year the bank’s analysts have pencilled in earnings of around £619m, up from £198m.
Not all of Cineworld’s purchases have been problem-free, however. Its Picturehouse chain, bought in 2012, has been involved in a pay and benefits dispute with staff, which led to picketing and strikes.
