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Cineworld's recent relief rally overdone, says Morgan Stanley
1st Jun 2020 15:07
(Sharecast News) - Cineworld shares slid on Monday as Morgan Stanley downgraded the stock to 'underweight' from 'equalweight' and slashed the price target to 60p from 180p, arguing that the recent relief rally was overdone.
MS noted the shares are up 64% in the last week, reflecting a combination of relief that cinemas are set to open in July, and the securing of extra liquidity, covenant waivers and extensions.
However, it said Covid-19 has accelerated structural risks from premium video on demand (PVOD), weakened the bull case, lowered the attractions of the proposed Cineplex deal and raised leverage. MS said it is bearish on the prospects for the H2 and 2021 slate.
The bank said the short-term impact of Covid-19 has been to close cinemas across the entirety of Cineworld's North American and European estates. It also appears to have accelerated what MS sees as the primary structural risk to exhibitors: studios experimenting with PVOD.
"Universal reportedly made as much revenue from its Trolls World Tour release (through streaming services) in three weeks as the film's predecessor did in a five-month theatrical run. While it is currently the only studio that has stated an intention to release future films on PVOD as well as directly to theatres, we see this as a trend that is unlikely to reverse and weakens the exhibitor business model."
MS said its refreshed sensitivity analysis shows a $60-180m EBITDA risk from PVOD, worth up to 27% of FY21 EBITDA.
At 1515 BST, the shares were down 5.8% at 79.52p.
MS noted the shares are up 64% in the last week, reflecting a combination of relief that cinemas are set to open in July, and the securing of extra liquidity, covenant waivers and extensions.
However, it said Covid-19 has accelerated structural risks from premium video on demand (PVOD), weakened the bull case, lowered the attractions of the proposed Cineplex deal and raised leverage. MS said it is bearish on the prospects for the H2 and 2021 slate.
The bank said the short-term impact of Covid-19 has been to close cinemas across the entirety of Cineworld's North American and European estates. It also appears to have accelerated what MS sees as the primary structural risk to exhibitors: studios experimenting with PVOD.
"Universal reportedly made as much revenue from its Trolls World Tour release (through streaming services) in three weeks as the film's predecessor did in a five-month theatrical run. While it is currently the only studio that has stated an intention to release future films on PVOD as well as directly to theatres, we see this as a trend that is unlikely to reverse and weakens the exhibitor business model."
MS said its refreshed sensitivity analysis shows a $60-180m EBITDA risk from PVOD, worth up to 27% of FY21 EBITDA.
At 1515 BST, the shares were down 5.8% at 79.52p.