How to profit from a love affair with Hollywood's silver screen
When I think about the so-called 'rare auld times,' the picture of Dublin's O'Connell Street in the 1950s comes vividly to mind.
One striking thing about those times was the lengthy queues outside the seven or eight cinemas dotted around O'Connell St queues that were a feature even in the teeming rain. The other barely credible image of these days is of ticket touts hovering on street corners at the weekends selling overpriced tickets for the same cinemas. That quaint recollection showed a peculiar Irish love affair with the cinema, which many people thought would be killed off by television. But that hasn't happened. Cinema remained but in a different form, like the company we are analysing today, Cineworld.
It trades as CW Group and shows movies in Ireland, the UK, Central and Eastern Europe and Israel. Founded in 1996 in England it's quickly become one of the leading cinema groups in Europe. Unlike the old distributors it not only caters for mainstream moviegoers but also for Art House films or events like opera and ballet. It is also the biggest exhibitor of Bollywood films in the UK with a 50pc market share.
Ten years ago, Blackstone Group - the US investment company - became its largest shareholder. A year later CW acquired the operation of the French company UGC which included the multiplex cinema in Parnell Street, Dublin. By 2007 CW became the only cinema group listed on the London Stock Exchange, and three years later Blackstone was gone.
The group embarked on an acquisition splurge in Europe in recent times principally because it had become dependent on the declining UK market which is dominated by three players; CW itself, Odeon and VUE. These three companies account of 70pc of the total market, CW having a market share of 28pc. The remaining 30pc of the market consists of smaller multiplex operators and independents. The company derives up to 10pc of its revenue from screen advertising and its joint venture, Cinema Media with Odeon accounts for 80pc of all screen advertising in the UK.
In February of this year, CW acquired Cinema City International (CCI) for £500m and its multiplexes in Eastern Europe and Israel. With this acquisition the company became the second largest cinema group in Europe with 200 cinemas and 2,000 screens. This has given a significantly broader base to its operation. The company is of the opinion that future growth opportunities will come from Eastern Europe; Poland and Romania showing the most potential. As a result the company plan 500 new screens over the next three years; half scheduled for Romania and one third for Poland.
Cinema revenue comes from three sources; box-office (admissions), sales of popcorn and soft drinks (retail) and cinema advertising, but cinema admissions drive retail and screen advertising revenue. Last year CW had 51 million cinema goers up from 48 million in the previous year.
Total revenue was £406m an increase of 13pc, box office sales increased 11pc to £208m, retail delivered £95m up on 2012 figure of £83m.
Interestingly retail revenue accounted for 50pc of the Art House box office revenue and almost a third of multiplex retail revenue. The company is experimenting with Starbucks outlets in its cinemas; 11 cinemas already have coffee sales. The trend in booking is also interesting as 42pc of all sales in the Art House cinemas are by internet and 23pc of mainstream cinemas up from 12pc in 2012.
Following CCI acquisition the group is now projecting revenue of £640m this year and £750m next year.
If this is achieved the company will have more than doubled its 2012 revenue. The increase in sales is also reflected in its pretax profits of £43m and expected to double by 2015.
The shares at £3.28p are pricey but have a satisfactory dividend yield of 3.5pc. Dividend per share at 10p last year is anticipated at 25p by 2015.
Cineworld is an interesting share with growth prospects, a good track record and a long way from the days of ticket touts wearing camel-hair coats and Hush Puppies.