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3 UK shares for the end of lockdown

We look at three UK companies from out of favour sectors that could offer investors opportunity when lockdown ends.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Coronavirus hit some sectors harder than others – bricks & mortar retailers, hospitality and airlines among them.

It will take a long time for companies in these sectors to recover – some never will. But with a route out of lockdown emerging, it’s worth thinking about whether there’s opportunity to be had in out of favour corners of the market.

Investing in individual companies isn’t right for everyone. You should make sure you understand the companies you’re investing in, their specific risks, and make sure any shares you own are held as part of a diversified portfolio.

This article isn't personal advice. If you're not sure if an investment is right for you make sure you ask for advice. All investments can go up and down in value so you could get back less than you put in. Past performance is not a guide to the future.

Don’t give up on the high street

Lockdown is the stuff of nightmares for physical shops. Coronavirus hasn’t just forced shops to close, it’s pushed people towards digital rivals and accelerated the existing trend for online shopping. Those slow, or unable, to respond have found themselves in trouble.

The fall of Arcadia, owner of Topshop and Dorothy Perkins, was certainly accelerated by the pandemic. But the situation isn’t the same for all shops.

Despite a distinct lack of meaningful online business, Primark owner, Associated British Foods is in a better position than you might think. When earlier lockdowns first lifted, demand rebounded strongly. The gap in like-for-like sales quickly narrowed to -14%, compared to -30% for the year as a whole.

We think that when rolling lockdowns come to an indefinite end, Primark is in a better spot than some of its peers. Financially, the group’s in a strong position, with net cash on the balance sheet.

The group also has a strong grip on its inventory. This held it in good stead when shops were forced to close and helped protect profits.

Chart showing Primark revenue (£bn)

Source: Refinitiv Eikon. Full Year revenue. *e = estimate.

Primark is also in the rare position of continuing to open new stores. Demand for its products prevails – in fact it had to extend opening hours to meet demand before Christmas. There’s still room for larger, multi-level stores on the high street. There just isn’t room for all of them anymore.

Reflecting uncertainty, ABF’s share price has been hit by the pandemic. While it’s recovered someway, it’s still 13.6% lower than February 2020, and the price to earnings ratio of 20.1 is in line with the ten-year average. The limited growth mirrors the difficult months that lie ahead – mapping exact demand patterns is pretty much an impossible task.

No one can say for certain what’s going to happen to our high streets. We do think there’s always going to be a certain amount of desire for people to “go” to the shops though, albeit in reduced numbers. We haven’t seen the last of the closures, but the opportunity for those that survive is potentially greater. Of course, even the fittest retailers will need a certain amount of footfall to grace the high street in order to survive long-term.

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The more hospitable hospitality option?

Tourism has ground to a halt because of coronavirus. That makes owning a hotel chain a very difficult place to be. Uncertainty is higher too, because it’s very unclear when, or if, travel is going to return to normal.

But we think some could take a larger slice of the tourism pie once lockdowns lift. Premier Inn owner, Whitbread is one of them. We think staycations will recover faster than super-luxury travel and large hotel events (conferences, weddings etc).

Premier Inn’s average room rate in the UK is around £60, meaning it’s well placed to capture the demand from staycations, or city-breaks. This is especially true if the outlook of the economy is gloomier than expected, which would see people rein in spending. A foothold in Germany offers medium term growth options too.

Chart showing Premier Inn's number of rooms

Source: Whitbread 2020 Annual Report.

None of this is to say Whitbread has a clear path ahead. Revenue per available room (UK) has fallen to £14.62 from £50.20 at the same time last year. However, we’re encouraged by the group’s liquidity position, helped by a £1bn rights issue last year. Net debt (readily available assets minus debt) of £323m is manageable at this stage. The group also has access to cash and credit of nearly £1.5bn, providing some breathing room.

The lack of clarity over profit predictions makes Whitbread difficult to value the usual way. The price to earnings ratio, based on last year’s earnings, is 17.7, which is a little way below the ten-year historic average. This shows the uncertainty about when demand will pick back up – and shouldn’t be overlooked. But we think bookings for well-known, affordable, domestic hotel travel will be among the first parts of the hospitality sector to recover.

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Maintaining altitude?

We should start this part by saying all airlines are in for a bumpy ride in the medium term. The collapse of international travel leaves serious damage for all the major carriers to clean up, because airlines have very high fixed costs.

And, much like shops and hotels, the rate at which demand returns is very hard to predict. Nonetheless, there could be opportunity for airlines who operate in the short haul sector in particular.

easyJet springs to mind here. Its exposure to budget travel is one bonus. But the group also has a dominant position in key European flying routes. This means easyJet has a stronghold on favourable flying “slots” at popular airports.

It further strengthened its competitive position by snapping up Thomas Cook’s slots at Gatwick and Bristol airport last year. This means it should be in better position to recapture a higher proportion of revenue than peers when travel resumes.

easyJet is also in a financially stronger position than we’d thought. A 50% fall in passenger numbers to 48.1m last year triggered the need for difficult decisions, including an expected 30% reduction in headcount. We admire the decision to bring maintenance in-house and re-negotiate heavy maintenance contracts. These changes should benefit costs far into the future.

Looking at the immediate future, the stemming of cash-burn, together with raising over £3.1bn of liquidity means easyJet has breathing room to stomach a winter of disrupted travel.

easyJet financing options Amount
Drawing on existing credit £400m
Loans £400m
Issuing new shares £400m
Government Covid Financing Facility £600m
Sale and leaseback of aircraft £1.3bn
Total £3.1bn of liquidity raised

Source: easyJet Annual Report 2020.

The potential with easyJet is very much a story of recovery, not immediate take-off for revenue and profits. The group expects to fly less than 20% of its planned capacity for the current quarter and is unable to give detailed guidance beyond this. So, it's important investors are prepared for turbulence.

Ultimately planes will take to the skies once more. And we think easyJet is one of the better placed names to take advantage of re-fired jet engines. The shares are valued at 2.4 times the value of easyJet’s assets, well above the ten-year average, reflecting the group’s enviable competitive position. In our view, there’s still potential upside to be had, for investors prepared to accept the external risks but there are no guarantees.

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One of Hargreaves Lansdown's non-executive directors is a non-executive director at easyJet.

Hargreaves Lansdown's Non-Executive Chair is also a Non-Executive Director of Whitbread..

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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