Investment Column: Cineworld still in the picture despite the slowdown

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The Independent Online


Our view: Hold

Share price: 203p (-5p)

Given the consumer squeeze and the competition from home entertainment, one might think the cinema would be suffering. But despite huge mark-ups on food, complaints about patrons who annoy others by leaving mobile phones switched on (and no ushers to boot them out) and high ticket prices, people are still going out to the movies.

Cineworld, Britain's biggest chain with just over a quarter of the country's screens, demonstrated this with yesterday's solid trading statement. The first half was shaky; profits fell, and while The King's Speech was a surprise hit, there was nothing around to match the likes of Avatar from 2010.

Things have been better in the second half. The Twilight Saga might induce head-scratching from anyone other than teenaged girls, but the results speak for themselves. There was also another unexpected Brit smash in the form of The Inbetweeners, and, of course, Harry Potter.

A strong box office offset falls in sales of screen advertising and 3D glasses, combined with flat sales of food and drink. Box-office income was up 2.7 per cent for the year to 29 December, with the final few weeks showing a flourish.

What's more, the 2012 slate looks promising. There's another Twilight, the first part of The Hobbit, the latest instalment in the rebooted Bond franchise, and, for younger viewers, another run-out for the Ice Age franchise.

Cineworld's shares have done well in recent weeks, and at 10 times forecast 2012 earnings, they aren't screaming bargains. Debt is likely to come in at close to £100m, thanks to the cost of converting screens to digital, and we'd be concerned about it edging much higher.

That said, the prospective yield is nearly 6 per cent, and comfortably covered by earnings. We'd hold and buy on any weakness.

Games Workshop

Our View: Sell

Share price: 780p (-40p)

Games Workshop is starting 2012 in a markedly different manner to the way in which it started 2011. Then it was mired in gloom as the warlords of chaos struck, forcing it to put out a profits warning. It seems the baddies have been chased away, because 2012 started out with a bang, the shares hitting a six-year high.

Games Workshop makes and sells model miniatures beloved of a distinct group of largely male consumers. They're still engaging in table-top battles with gusto and spending money, as well as hours on end, in its eponymous chain of shops.

What's more, the appeal of its flagship Warhammer product is global. More than 70 per cent of sales are generated from outside the UK.

While Warhammer might prove there is life beyond digital, the company has none the less been able to capitalise on the potential its intellectual property offers the video gaming industry. The company received a chunky royalty payment from the software developer THQ for the latter's Space Marine game.

Pre-tax profits for the six months ending 27 November soared to £9.5m from £6.8m. In a tough economy, being a niche player can pay dividends. Having a growing international presence also helps.

That said, the market has woken up. The shares now trade on more than 12 times full-year earnings, and Games Workshop hasn't been immune from choppy waters in the past. While the prospective yield of over 6.5 per cent is very good, we've been backers of these shares for some time. We wouldn't criticise anyone for holding on, but now is a good time to book profits.