M6 BARRON’S September 2, 2019
EuropeanTrader
Cineworld Set to Steal Show
ByCallumKeown
CINEWORLD GROUP COULD OFFER BLOCKBUSTER RETURNS FOR INVESTORS AS IT
lookstocashinonitsmonthlysubscriptionserviceandaslateofstrongfilms.
TheUnitedKingdomcinemaoperator(ticker:CINE.UK)hasstruggledin
recentyearswithaweakfilm-releaseschedule,decliningattendance,anddis-
ruptionamidtherefurbishmentofitsU.S.movie-theaterchainRegalEnter-
tainment Group.
Sharesincreased531%overnineyearstoapeakof311penceinMay2017,
compared with a 31% rise in the FTSE All-Share Index. Since then, shares
have dropped 28%, to 225 pence.
A solid movie lineup for the rest of year will provide short-term upside,
whilearenovationofRegalcinemaswillresultinhigheradmissionprices,im-
provingprofitmarginsinthelongerterm.Cineworldispoisedtoregainlost
groundwiththeU.S.launchofmonthlysubscriptionserviceRegalUnlimited.
TheLondon-listedcompanylastmonthreportedan11%declineinrevenue
to$2.15billionforthefirsthalfoftheyearanda13%dropinpretaxprofitto
$139.7 million as admissions fell 14.4%, but earnings before interest, taxes,
depreciation, and amortization of $488.5 million came in above expectations.
Full-year revenue for 2018 was $4.1 billion, and RBC Capital Markets esti-
mates that it will reach $5.1 billion by 2021.
BrokerRBCCapitalMarketsratedCineworldaBuyandinanAugustnote
markeditata70%premiumof400pence.Jefferieshasatargetpriceof445
pence,whileCanaccordGenuitysayssharescouldreach355pence.Cineworld
trades at 8.4 times future earnings—a 40% discount to its peers.
Cineworld was founded in 1995 and opened its first cinema in Stevenage,
England,thefollowingyear.Ithasgrownintotheworld’ssecond-largestcinema
chain, behind AMC, through expansion in the U.K. and Eu-
ropeandacquisitions,includingRegalEntertainmentin2018.
Cineworldhas9,494screensacross786sitesandexpects
to open nine more sites—with 86 screens—by year end.
The cinema industry has come under pressure from
streaminggiantsthathavemadestayinghomewithanendlesschoiceoffilms
appealingtoconsumers.Cineworldiswellplacedtobecomeanattractivealter-
native as it improves the consumer experience.
Julian Easthope, an analyst at RBC Capital Markets, said Cineworld’s
shareshavemovedtothebottomofitstradingrangeand“providegoodvalue
in a proven management team with plenty of opportunity from Regal.”
Despitethethreatposedby Netflix (NFLX)and Amazon.com (AMZN),box-
office smashes still pull in customers to watch these movies on the big screen.
Apackedlineup,including Frozen2, theconclusionofthe StarWars trilogy,and
thesuccessfulremakeof TheLionKing shouldgivethecompany’sstockaboost.
Cineworld will also benefit from the July launch of Regal Unlimited. The
service allows viewers to watch as many films as they want for $18 to $23.50
amonthdependingonlocation,andshouldallowCineworldtoclosethegapon
AMCEntertainmentHolding (AMC)and CinemarkHoldings (CNK).AMC
launchedasimilarserviceinJune2018andhasamassed900,000subscribers.
Cineworld CEO Mooky Greidinger said in a statement to Barron’s that
“investingintechnologyandcustomerexperiencecontinuestobeakeypillar
ofourstrategy,mostrecentlymadeevidentbythelaunchofourhighlyantici-
pated Unlimited membership program in the U.S.”
Acombinationoflong-termstrategicinitiativesandshort-termwinsmeans
that Cineworld’s stock could steal the show for investors.
European
Markets,
pageM26
EmergingMarkets
Brazil Trails After Pension Vote
ByCraigMellow
THE AMAZON RAIN FOREST IS NOT THE ONLY SCENE OF DEVASTATION IN BRAZIL.
The iShares MSCI Brazil exchange-traded stock fund (ticker: EWZ) has
dropped 15% since July 10, twice as much as global emerging markets over
that period. The national currency, the real, has lost 5% against the dollar.
The plunge is perplexing because July 10 was the day that Brazil’s lower
house of Congress passed pension-reform legislation that investors had
touted as a make-or-break event. “There’s a little bit of buying the rumor,
selling the news going on,” says Verena Wachnitz, a portfolio manager for
Latin American equities at T. Rowe Price.
Actually, there’s more to it than that. Brazil’s economy, No.8 in the world,
refuses to rebound. Gross-domestic-product growth hasn’t hit even 2% since
- The government ruined the pension-reform party on July 12 by halving
this year’s forecast to 0.8%. Pension reform, assuming the Senate passes it
this autumn, may stave off fiscal calamity. But real dynamism requires still
more challenging overhauls of a maddeningly complex tax system and over-
weening regulation, says Sudarshan Murthy, a senior analyst at fund man-
ager GQG Partners. “Reform of taxes and the bureaucracy are going to run
up against a lot of vested interests,” he predicts.
The most attractive Brazilian companies are still expensive despite the
market slump, he argues. Beer giant Ambev (ABEV), for instance, is priced
at 21 times expected earnings, despite losing market share within Brazil to
archrival Heineken. Pharmacy chain Raia Drogasil (RADLY) trades at a for-
ward price/earnings ratio above 40. “There’s scarcity value in the good com-
panies there,” Murthy says. “We are finding better opportunity in China.”
Wachnitz takes a more optimistic view, based on macroeconomics. Inflation
in Brazil is back down below 4% after an uptick last year. That, and the dov-
ish shift by the U.S. Federal Reserve, allowed the central bank to cut interest
rates by half a percentage point in late June, to a historic low of 6%. With
a large, domestically focused economy, Brazil is relatively insulated from mul-
tinational trade tensions. The country’s top export, soybeans, is winning big
from the U.S-China conflict. Long-dormant business investment may come
off the sidelines should pension reform become law, as expected by late
October.
Againstthissalubriousbackdrop, Wachnitz is eyeing beaten-down bank-
ing stocks. Itau Unibanco Holding (ITUB), the biggest company in Brazil’s
index, has lost 17% of its value since July 10. The slightly smaller Banco
Bradesco (BBD) is down 25%. “It’s healthy to see a correction,” she says.
“The banks look attractive at this point.”
Still, she’s not plunging in head first. This being Brazil, plenty could still
go wrong—starting with pension reform, which was supposed to be a done
deal back in 2017 before corruption charges against then-president Michel
Temer derailed it. This time, the graft finger is pointing at Rodrigo Maia,
the lower house president who is the lynchpin of reform in Congress. The
federal police recently sent evidence of his alleged involvement with corrup-
tion to the courts.
The Amazon rain-forest fire “is not relevant to the investment environ-
ment so far,” Wachnitz says. But it could depress President Jair Bolsonaro’s
popularity and diminish his already short attention span for the complexities
of economic policy. Prices are sinking for Brazil’s No. 2 and No. 3 exports,
iron ore and crude oil. Sticking a toe in may be more appropriate.