In its results for the year to 31 December, international cinema group Cineworld (CINE) reported revenues down 6.2% to $4.4bn and earnings before interest, tax, depreciation and amortisation (EBITDA) 4% lower at $1bn, in line with last week's unscheduled trading announcement.
The fall in revenue was due to tough comparisons from last year which saw a strong roster of film releases.
However, the company’s assessment of the possible damage to its business if it has to close cinemas to stop the spread of coronavirus seriously spooked investors, sending the shares down a thumping 35% to 53p.
DOWNSIDE SCENARIO
The board has assumed 'a total loss of revenue across the enlarged estate for between one and three months', with no reduction in fixed costs should sites be temporarily closed.
In such a scenario, it would cut capital expenditure by 90% and suspend dividend payments.
Although the board admits its downside scenario is unlikely, if it were to happen ‘there is a risk of breaching the group’s financial covenants, unless a waiver agreement is reached with the required majority of lenders.’
The combination of falling revenues and high fixed costs can be toxic, especially if combined with financial leverage, as we wrote this week.
The company’s $2.3bn acquisition of US cinema operator Cineplex brings several positives to the group - including future 'combination benefits' of $133m - but shareholders must not ignore the additional financial burden, as we noted following the announcement on 16 December 2019.
FINANCIAL COVENANTS
The deal was financed using a $2bn extension to the firm's existing debt and a $300m unsecured bridge loan.
Lenders typically apply covenants to their loans to help protect their financial interests and ensure they get their money back in a worst case scenario.
The most common metric is debt to EBITDA and for Cineworld the level is set at a maximum of 5.5 times.
The company highlighted a strong slate of film releases for 2020 including Black Widow, Wonder Women 1984, Bond 25: No Time to Die and Godzilla vs. Kong but admitted that their release could be delayed until later this year.
