In May a camouflage-clad Brad Pitt sauntered past cinema screens and straight into viewers’ homes. War Machine, Pitt’s film about the Afghanistan conflict, was broadcast exclusively on the internet streaming service Netflix.
This is the sort of challenge that the FTSE 250 cinema chain Cineworld must face up to. Amazon and Netflix are breaking decades of dominance by the Hollywood studios by skipping the big screen and jumping straight onto laptops and TVs.
Yet experts have been predicting the demise of the cinema since the arrival of the TV set. Cineworld, Europe’s second-biggest chain after Odeon, is shaking off this latest challenge with gusto. Its shares have been on a tear, as it opens new cinemas across the Continent. They ended last week at 717p, to value the chain at £1.9bn.
There’s little sign of the land grab slowing. The chain, which was founded in 1995, has grown through a string of acquisitions and opening new cinemas. It added 78 screens last year and is opening a further 132 this year. More deals across the Channel are likely to follow.
Cinemas on the Continent offer Cineworld a natural hedge against a slowing UK economy, as euro-denominated profits are translated into sterling. About half its patrons are outside the UK and Ireland, where its European operations earn higher profit margins and are seeing stronger growth.
Advertisement
First-half profits, out this week, are expected to have benefited from a strong line-up of new films, from Beauty and the Beast to The Fate of the Furious. The second half will also be helped by releases such as Dunkirk and Star Wars: Episode VIII.
But Cineworld can’t afford to be complacent. Last year Dalian Wanda, the Chinese owner of American giant AMC Theatres, acquired Odeon for £921m. After years of underinvestment by Terra Firma, a rejuvenated Odeon will offer tougher competition.
Yet Cineworld is upgrading its sites, too, with 35 in the UK being given a revamp. That doesn’t just mean a lick of paint: overhauls involve adding Starbucks units, VIP areas and 4D special effects such as wind, fog and smells.
Analysts at Investec reckon that if cinema chains were to overhaul their tired British sites en masse this could deliver a hefty jump in admissions within a decade, from an average of 2.6 visits per person per year to 3.4 visits.
Cineworld’s shares will not repeat the past few years’ runaway gains, but there is still room for growth. Buy.