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Stock of the week: Cineworld

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Graham Spooner, investment research analyst at The Share Centre, picks Cineworld as stock of the week this week.

This week’s stock of the week is Cineworld. The FTSE 250-listed company has built a good track record of growth through both acquisition and by organic means. Having recently focused on the UK and Eastern Europe, the company bought the large US cinema chain Regal Entertainment for $5.8bn in 2017, positioning the group as the world’s second largest cinema operator.

The potential for long-term growth has increased in Central and Eastern Europe where rising ticket prices should also boost profits. Moreover, the group recently announced a partnership with 4DPLEX leading to the opening of 100 new 270-degree panoramic ScreenX locations at its theatres in the next few years.

In March the company reported a 12% rise in full-year revenue to £890.7m with pre-tax profit up 23% to £120.5m. The company said it was encouraged by the slate of movies due to be released in 2018, including ‘Jurassic World’ and ‘Mary Poppins Returns’. It also reported during its first quarter trading update in May that the popularity of blockbusters ‘Black Panther’ and ‘Avengers: Infinity War’ helped annual revenues jump 10.1%.

The shares trade on a 2019 price/earnings ratio of 10.6, which is low compared to peers, and a good prospective dividend yield of 4.6%. The outlook is positive for the group, with a good pipeline of new blockbuster films and an increased focus on more family-oriented films.

Strong cash flow is helping to increase dividends, cut debt and fund further expansion, and the growth in the European business as well as the Regal deal will serve to bolster this progress.

As such, we continue with our ‘buy’ recommendation but it’s important to note that the Regal acquisition also involves taking on a large amount of debt and the lack of management experience in the US means that the shares are only for those willing to accept a higher level of risk.

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