Cineworld’s 3-D pays dividends

No 3-D glasses were required to bring Cineworld’s figures into focus.

Britain’s second-biggest cinema operator reported results that were comfortably ahead of City expectations: earnings per share rose 11 per cent in 2009 on underlying revenues up 9 per cent to £333 million. The dividend was raised 11 per cent and net debt continued to move in the right direction: down £13.1 million to £104.3 million.

But then the company, which operates 790 screens across 77 locations, might have been expected to prosper in a year which opened with Slumdog Millionaire and closed with Avatar — the James Cameron blockbuster that is now the biggest-grossing film in cinema history.

Where Cineworld has been able to outperform its peers is through its early investment in 3-D, the format in which 13 films were released in 2009, against only four in 2008. With 3-D films commanding a premium price — an average £5.90 a ticket, compared to £4.54 for normal 2-D screenings — a 7 per cent rise in Cineworld’s admissions brought a 15 per cent rise in box office receipts.

The current year has started well, too, with most of Avatar’s sales falling into 2010 and Alice in Wonderland, which opened last weekend, raking in nearly £15 million to date. Given that Cineworld typically has at least two 3-D screens at each multiplex site, compared with one for most rivals, it should be able to benefit from keeping existing 3-D films on longer as new 3-D films are released — such as the remake of Clash of the Titans, which opens for the Easter holidays. The other encouragement is that Cineworld cites a tentative improvement in screen advertising which, having fallen an unprecedented 39 per cent in 2009, provided the biggest drag on last year’s numbers. The advent of 3-D cinema adverts, trials of which were run by Cadbury and Sky for Avatar, could provide a further boost.

Cineworld has felt the credit crunch in other ways. A continued lack of funding for property developers — on whom it is reliant — means 2010 is likely to be the first year in which the company opens no new cinemas. That means the near-term focus of capital expenditure will be the further conversion of its estate to 3-D: an additional 102 screens are slated over the next few months.

Two lingering concerns. First, the extent to which the month-long World Cup will disrupt demand at the start of the summer. Second, the depressive effect that Blackstone’s presence on the register will have on the shares. The US private equity house sold £63 million of stock last September but still sits on a 20 per cent stake — and with the shares now above their 170p issue price, it might be expected to sell more.

Even so, at 172½p, or ten times 2010 earnings, and yielding a solid 5.8 per cent, Cineworld should be held for the dividend alone.

Dignity

Undertakers tend to maintain a gloomy demeanour. Not Dignity, Britain’s only quoted provider of funeral services, which yesterday reported a “positive” outlook for current-year trading. However, as its full-year results showed, the company has been able to keep sales and profits moving ahead even when the UK death rate falls — as it has, by between 1 per cent and 2 per cent, throughout Dignity’s six-year history on the stock market.

The concern from yesterday’s numbers is that the company has lost modest market share — it carried out 5 per cent fewer funerals in 2009. But that setback was more than offset by Dignity’s expansion in crematoriums, where the addition of five new sites helped sales to rise 18 per cent. It is also making solid progress in selling pre-arranged funeral plans — up 6 per cent on the year to 216,000 — through which it locks in future revenue. Overall, operating profits rose 8 per cent on sales up 5 per cent and the dividend was raised 10 per cent — all much as expected.

Dignity contends that spending on funerals is determined more by social and economic conventions than by the wider economy. Indeed, discretionary spending on its services — such as memorial stones — has remained reassuringly steady through the recession. Increased pressure on the public finances could also work in the company’s favour if it increases the so-far slow pace at which local authorities have been contracting out their crematoriums to the private sector.

The shares’ 20 per cent rise over the past four months has less to do with the stock market’s renewed preference for defensive investments than with the belief that Dignity may return cash to investors — much as it did in 2006, when it handed back 100p a share as part of a debt refinancing.

However, at 677½p, or 15 times earnings, the shares are up with events. Pass.

Clarkson

If stockbroking is a notoriously volatile business, shipbroking is little different. That much is evident in charter rates for the world’s largest oil tankers, which collapsed from $250,000 a day in early 2008 to only $30,000 at the end of last year.

So it might come as little surprise to find that the world’s biggest shipbroker has not escaped unscathed from the worst downturn in its sector since 1974. Clarkson found that rock-bottom charter rates meant lower commissions. So, too, did an average 25 per cent fall in the value of second-hand tankers, where it takes a cut of their price on purchase and sale. Overall, operating profits fell 39 per cent to £24 million on sales down 29 per cent to £177 million.

But yesterday’s full-year results showed signs of renewed confidence — not least in the 1p rise in Clarkson’s final dividend, which had been kept on hold a year ago. Charter rates have bounced off the bottom, broking volumes have picked up and an increased number of ships are changing hands. There has also been a return of time chartering, whereby vessels are hired at fixed rates for periods of typically between three and five years, rather than at spot rates — indicating that movers of seaborne cargo are keen to lock in current rates before they rise further.

For its part, Clarkson says that its broking transaction volumes actually rose last year, suggesting that, in tougher times, trade has migrated to the bigger players. Equally, its overseas expansion has continued apace, especially in Asia, where it is the biggest shipbroker in Shanghai and Singapore. For the first time in its 157-year history, Clarkson has more staff abroad than on its home turf. At 853p, up 35p, or nine times 2010 earnings and yielding 5 per cent, buy on weakness.

Nick Hasell, The Times 12-03-2010

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Nick Hasell, The Times

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