Nomura upgrades Cineworld on valuation grounds

Nomura upgraded Cineworld to ‘buy’ from ‘neutral’ with an unchanged price target of 588p saying the valuation is now attractive.

It noted the stock underperformed the FTSE All-share index by 9% over the past three months, weakness Nomura attributed to high expectations for the fourth quarter due to the Star Wars and Bond movies, and the lack of upgrade from its trading update on 12 January.

“We thought that this was a risk given that Cineworld typically underperforms the wider market in ‘blockbuster-heavy’ years,” it said.

But the Japanese bank said it’s not just about film slate, with 80% of earnings growth coming from self-help.

It forecasts group earnings before interest, taxes, depreciation and amortisation rising to £192m by 2018 from £152m in 2015.

Of this £40m increase, it estimates the current estate will only contribute an additional £8m, or around 2% per annum, with the balance driven by new cinema openings.

Nomura also pointed to the uniqueness of Cineworld’s ‘Unlimited’ card, which is behind nearly 30% of its UK box office receipts.

“The renewal rate for its around 440k members is high, implying long-term revenue visibility,” it said.

Finally, it said the stock’s valuation was now attractive, at 15.8x 2016 price-to-earnings.

At 1544 GMT, Cineworld shares were up 3.4% to 498p.