Last year The New Yorker magazine commented that “movies really are recession proof”. Recent statistics from the British Film Council support this view. There were more than 173.5 million visits to the cinema in Britain in 2009 – the second-highest number since 1971.
This stellar performance has been driven by a string of highly successful global blockbusters, such as Avatar, the highest-grossing film in history and the first to surpass the $2bn mark. Over the medium term, sector growth looks likely to receive a further fillip from digital technology bringing with it margin-enhancing film technology, such as 3D. Indeed, 80% of Avatar’s national UK box office derived from this format. This is all great news for Cineworld, the number-two player in Britain, with just over 24% of the cinema box office.
While recent sales growth was held back by the World Cup, the company should soon start to reap dividends from its investment in digital technology. In June it signed a major deal with Arts Alliance Media to convert the remainder of its 801 screens to digital by 2013, with just over half completed by the end of 2010. According to CEO Stephen Wiener, this makes Cineworld “the 3D market leader in the UK”. More than 20% of admissions in the first half (H1) of 2010 were attributable to 3D, compared with just 8% in H1 2009. This trend looks set to continue as the number of 3D film releases more than doubles to 18 in the second half. Conversion to digital also enables Cineworld to tap new revenue streams through the provision of alternative content, such as live opera, theatre, music and sport.
Gamble of the week: Cineworld (LSE: CINE)
In its interims, Cineworld reported that its average ticket price increased by 7.4% to £4.93 as the benefits of digital started to feed through to margins. It also reported a strong start to the second half and is confident of “performing in line with market expectations”. There is a strong release schedule in the fourth quarter and a slate of 3D films. These include Harry Potter and the Deathly Hallows: Part One, which is likely to gross £50m at the British box office. One area of uncertainty remains, however: advertising, which accounts for around 20% of earnings before interest, tax, depreciation and amorti-sation.
Cineworld is on a prospective p/e of 11.6 times for 2010, falling to 10.5 for 2011. That’s pretty reasonable, given its strong prospects. In these uncertain times a dividend yield of 5% is also attractive. The firm is followed by five City firms; four rate it a ‘Strong Buy’.
Recommendation: BUY at 194p