PAUL SCOTT comments - STOCKOPEDIA - CINE17 Aug 2022 13:29
My opinion - none of this should come as a surprise, because CINE has been operating with a ridiculous, over-leveraged (that’s putting it mildly) balance sheet for some time. We’ve been ringing the alarm bells about it here for a long time.
For example, as at 31 Dec 2021, NAV was $345m, but that included $5.3bn of arguably worthless goodwill and other intangible assets. Write those off, and NTAV was negative at $(5.0)bn! How is that even possible?!
Net debt at Dec 2021 was $4.8bn - when a company owes its creditors this amount, then it’s the creditors who are in charge effectively, not equity holders. When control slips away from equity to debt, it usually ends in a near, or complete wipe out for equity, unless they’re prepared to stump up fresh cash in a meaningful way.
Hence being long of this share was just idiotic. Or based on pure hope that lenders would continue rolling over the debt, and the company could trade its way out of trouble. Although that was never likely, given the huge scale of finance charges, as lenders tend to increase the cost of debt as it becomes riskier.
All that remains to be seen now, is how brutal the debt holders are in the negotiations to swap debt for equity. I would argue the equity is likely to be worthless as things stand now, so the only reason debt holders would be kind, is if existing shareholders stump up a significant amount in a refinancing. For existing holders, it probably makes more sense to just ditch whatever is left, and move on, and maybe take a refresher course in understanding balance sheets, because there was nothing subtle about the risk here, it was obvious.
To be fair, the pandemic didn’t exactly help, but CINE was set up for failure before that, due to a reckless acquisition strategy that involved taking on ruinous debt.
Well done to shorters here, that was a logical trade, and required patience too. I don’t do shorting any more, because it’s so difficult, and share prices of distressed companies can behave in a completely irrational way - I remember both Thomas Cook, and McColls roughly doubling in price, shortly before they went bust. Hence shorters can be stretchered off just due to the irrational volatility. And what if you’re wrong? Then you could face being on the wrong side of a multibagger.
Another reason to avoid shorting, is that you can’t guarantee that the position would stay open. Shorts are often closed out, because the lender of the stock calls it in, at a time & price of their choosing. It’s very specialised, and high risk, so for most people I think shorting is definitely best avoided. Leave it to the experts, and even they get burned badly every now and then.
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