Cineworld Group PLC’s (LON:CINE) shares are “almost certainly the wrong price” but there are still “too many unknowns” about the outlook for the company to be sure where it will head next, according to analysts at Berenberg.
In a note on Thursday, the broker upped their target price for the chain to 85p from 70p but retained their ‘hold’ rating, saying they found Cineworld’s reporting to be “unnecessarily complicated” and that “clear guidance in important areas” such as dividend payments was “lacking”.
“We feel that, even if management can recover equity value in the business, this will weigh on its future earnings multiples”, Berenberg said, although looking at the bigger picture they still believed cinemas has “an important role to play in the movie industry” and predictions of their demise were “misplaced”.
However, the broker warned that COVID-19 has “provided the black swan event to drive fundamental change in the way movies are distributed”.
“Most notably, it appears that a significantly shorter exclusivity window will become the norm (c30-45 days, versus c90 days previously). While upwards of 90% of revenues are made in those early weeks, even a marginal reduction in revenues would negatively affect earnings, with a high drop-through margin”, Berenberg said.
“Cineworld management has implied that any shortfall will be made up with a better revenue share – but these deals are shrouded in smoke and mirrors, and the proof remains to be seen.
“We struggle to have much conviction about what is likely to happen next, and the limited guidance from Cineworld (particularly on its priorities for cash in the coming years) only makes it more difficult”, analysts added.