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Cineworld CINE - using technicals to improve pricing


rimmy2000

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29/Nov Cineworld (CINE) dropped intraday as much as -20% LoD on news that it was considering buying a complimentary cinema business in the USA: Regal Entertainment Group. This seems to have spooked the market, perhaps shareholders believe there would be too much indigestion and fear CINE are taking on more than they can reasonably handle (CINE already has an aggressive European strategy) I spotted this in the morning RNS, and was not (at the time) a CINE holder.

 

CINE is a great company that owns its own cinemas in the UK, branching out into Europe and also owns the art house Picturehouse chain of cinemas. I last owned CINE in 2014 when I bought around the £4.00 mark, I then sold during 2016 for over £6.00 taking a 50+% gain over the period.

 

I have wanted to buy back in for some time at a time when value presented itself, rather than buying into the ever rising price (shares have traded up to £7.44 high of year (HoY) this year)

 

My platform alerted me once the price broached under the £6.00 mark that CINE was falling, so I began to work out what was happening. You can do similar by setting an Alert from within the IG platform.

 

I already had a note on my chart telling me to look for £5.50p to buy. I determined this price using a range of previous fundamental analysis (see former posts) but also using some simple technical analysis to try and understand where the price might reach before it pivots.

a.JPG

I used a simple 200 period moving average and looking at this could see that CINE was trading way above its 200MA especially during the HoY during which the 200ma coincided with the £5 mark. I am a firm believer in mean reversion theory ( https://www.investopedia.com/terms/m/meanreversion.asp ), especially-so and even in solid and reliable stocks.

 

Additionally I used a Fibonacci retrace to try and locate previous pattern in the buying and selling of this share. This was overlaid onto a weekly candle chart and came out thus.

b.JPG

This overlay worked particularly well and I could see clear fit with the chart and retracement lines at £6.50p (61.8%), £6.20p (50%), £5.91p (38.2%) and £5.55p (23.6%)

 

The price had already broached £5.91p so my strategy being to wait for the next move downwards. If it didn’t then I would walk away. However, this occurred intraday around 14:30pm and my orders around £5.55p were filled, the candle highlighted yellow is the point I purchased and sure to the textbook, the share bounced at £5.55p - I made no further adjustment to the retrace.

c.JPG

Now I am not saying this will work all the time and who knows the move may still head lower but this hopefully shows that a clear and methodical plan, and executing upon that plan can prove both profitable and satisfying. I have a tight stop in place and would exit on signs of continued weakness.

 

My article is clearly not a precis into the wherewithal of CINE, that can come another day, but in terms of timing your trades I hope this helps As I write the price of CINE is £5.78, so 23p (23pts) above the low of day. To a spread better, at £10pp this could amount to an easy £230 trade.

 

Rimmy2000

 

– Incidentally the 14:30 candle coincides with the open of the US market and clearly this could be in at least part responsible for the turnaround in price. Keen to hear from anyone wishing to discuss this.

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The price level I previously quoted has been tested, however there is clearly strong buying support at this level. Looking at today's daily, I think the price is now almost bottomed out. In hindsight, I would prefer to now open a long position on CINE, esp. so if the share closes around the 549. (edit: assuming the price closes as described)

 

I don't do too much tech, but look at the image below, circled:

a.JPGIf this holds then I think the Risk Reward is looking extremely favorable. I would set a stop below the daily candle (low currently 527p) , perhaps allowing 10% on the stop = 475p or thereabouts. TAs would class this candle as a 'doji' Again, I am not hugely into TA, but this usually signifies the end of a move.

 

I have quickly pulled out a page from a TA book on the matter:

 

IMG_0944 (1).JPG

THIS IS NOT ADVICE, but keen to see how it progresses. 

 

 

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Cineworld has entered agreement to buy Regal Cinemas of USA. Regal is listed on the US and the size of the deal determines it a reverse takeover https://www.investopedia.com/terms/r/reversetakeover.asp where the smaller party (CINE) is incorporating the larger (REGAL)


Partly, I hoped the deal would fall through, because it’s quite a sizable deal, and a sizable responsibility and undertaking. However today we are given information on the deal, and after listing to the analysts call (still ongoing) management are convinced this is a rinse and repeat of what they have done previously, in buying up Picturehouse, expansion into Europe (2014 purchase of CCI)

 

Based on number of screens, Regal are the 2nd largest cinema in USA. They have screens in 48 states.

a.JPG

 

I have been on today’s investor call, and what CINE are focussing on is the opportunity to improve the ‘experience’ of USA cinema and thus increase pricing and earnings. The cinemas in the USA are not sophisticated, and the UK leads the way with innovation in the cinema.

 

What one cannot argue with is CINE’s track record. Between 13-16 CINE increased admissions by 11m visits, revenue has compound grown at 6.7%  EBITDA margin up by 203bps. During this period shares in Cineworld improved for 352p to over 700p

 

Buying a complimentary business will bring rationalisation benefits. CINE quote c. $100m savings at EBITDA level and another $50m ‘Structuring’ benefits – not sure I understand that, but seems to relate to overhead costs that both groups incur (audit, accounting, tax, payroll and CRM benefits I presume)  The $100m synergies appear to arise from $40m of best practice initiatives across sales, marketing and improving customer experience, whilst $60m are expected to be derived from reducing the listing fees down to a single company, economies of scale and purchasing might, operational streamlining and joining up core functions. These estimates EXCLUDE CAPEX synergies (such as screens, projectors, sound and lighting, fixtures and fittings)

 

CINE also cite that under the current US administration corporation tax will likely be cut, further adding to the bottom-line figure.

 

The deal will go ahead for $23/Regal share, which translates to 8x EBITDA. This seems to be reasonable, by comparison CINE’s own 2017 EBITDA estimate is £198.4m, so currently trades on 7.5x EBITDA.

 

On the flip side CINE will be taking on debt to fund the deal. I think this is what is spooking the market right now. CINE provide some insight into this, it will amount to approximately 4x the combined group’s 2017 EBITDA. As a rule, debt above 3x earnings or PTP can be a concern, so I appreciate the caution against this.

 

Timeline of deal.

January 18 post of circular and prospectus (detailed info on deal)

Feb 18 EGM and rights issue launch

March 18 expected completion.

 

Call concluded with this point. A cinema chain needs five things in place to be successful:

Product – good film slate

Locations – regal are good sites, established

Improved customer experience – track record

Control of Costs - efficiency

Committed mgmt.

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Closing this out. Gave it more thought last night and decided was not happy with a) potential debt position, b) pending rights issue. In hindsight would have been good to have sold the technical bounce(which was the purpose of this thread). I do think CINE will come good long term, but this is a significant deal and the new co' is now not comparable to former CINE. Sold for -4%, total positions c. £5.5k.

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