For a company to have haemorrhaged value in recent weeks is hardly surprising, particularly if it is at the coalface of shutdowns, supply chain disruptions and other market seizures. Whether the shares can bounce back again — and quickly — when the beginnings of normality return, however, is another matter.
Yesterday Peel Hunt took a stab at identifying likely candidates, in a note to clients looking at Covid-19’s “fallen stars” that contains some thought-provoking names. Its analysts looked at the 150 companies listed in the FTSE All-share and Aim 100 whose shares have fallen by more than 40 per cent since the beginning of the year. Then they put together working assumptions about how events might unfold over the rest of the year. These are detailed, but broadly the approach is built around government action and the hit to the economy.
To synthesise: lockdown restrictions ease by the end of June and non-essential sectors begin to return to work, but social distancing remains in place. The government acts to support industry, in particular construction, healthcare and defence. It also takes steps to provide relief for business with, for example, lower VAT, stamp duty holidays, rates, rents and tax concessions. GDP falls by 13 per cent this year, most heavily during the second quarter but then returning to its pre-crisis level by the end of the year and recovering momentum swiftly thereafter. Demand for oil recovers, but prices stay low; inflation is subdued, interest rates stay at rock bottom and unemployment rises to 6 per cent next year.
With those assumptions in place, Peel Hunt identifies companies that may have been too harshly punished by the stock market. These include:
Bakkavor, the supplier of fresh and chilled prepared meals and salads to supermarkets, which was set up in 1986 and listed in 2017 at 180p a share. It also operates in the United States and in China, where orders for its products are already beginning to recover.
The problem for Bakkavor is that its ready-made meals are ideal for consumers with busy working lives. The lockdown has renewed people’s interest in home cooking so, after an initial flourish, sales are predicted to fall.
Peel Hunt is forecasting a 7 per cent drop in like-for-like sales this year and has cut its estimate for pre-tax profit by 34 per cent to £54 million. Growth will resume next year, but much more modestly and the broker has pared back next year’s forecast profit before tax by 32 per cent to £65 million. This column rates Bakkavor’s product range and financial flexibility, but has not previously been a fan, put off by the small free float of only about 25 per cent and rising ingredients costs.
The shares, up 2p, or 3 per cent, at 70p, are cheap, trading at only six times Peel Hunt’s forecast earnings but with no yield as the dividend has been cancelled. With cost pressures unabated and the American and Chinese businesses still loss-making, they are not compelling.
McCarthy & Stone was finally finding its way through its own crisis when coronavirus hit. In fact, after steering clear for much of last year, this column recommended buying the housebuilder’s shares in February, when the price was 149½p. They were up ½p, or 0.5 per cent, at 72½p yesterday.
McCarthy & Stone is Britain’s biggest builder of retirement homes, with a share of the market of about 70 per cent. It built just over 2,300 properties last year, the average selling price for which was £308,000.
The company has reinvented itself after a profits warning last year, calling a halt to an overambitious expansion drive to concentrate on sustaining margins. Crucially, its new approach is built on flexibility: customers can either rent or buy. This cushions the group from much of the vagaries of the housing market in normal times, including by making it a property manager as well as a builder. Now it has closed sites and sales offices, furloughed staff and cancelled the dividend.
Government support for wages and the lack of building mean that monthly costs are low, but Peel Hunt thinks it will need its banks to waive covenant restrictions on its debts if the lockdown continues past May or June. If it persists for several months after that, it might also need to turn to shareholders for cash, the broker thinks. Given that Persimmon, Vistry and Taylor Wimpey are resuming works or are preparing to do so, it would be unsurprising if McCarthy & Stone was to follow suit in the coming weeks.
The company has an attractive business model, which Covid-19 does not jeopardise. The shares, down 51 per cent this year, are also cheap. The dividend has been cancelled so there is no yield, but the shares trade for only 7.8 times Peel Hunt’s forecast earnings. While obviously a possibility, the prospect of a cash-call does look fairly remote. It’s quite risky, but the share price is an opportunity.
There are several things going against Workspace in this pandemic. The company is one of the leading suppliers of flexible office space and was set up in 1987 as the vehicle for the sale of industrial properties owned by what was Greater London Council. It owns the freehold on about 65 properties accounting for almost four million square feet of space and has about 3,000 customers.
First, protections for tenants introduced by the government meant that Workspace received only about half of the rent that it was due at the end of March, a common payment date for landlords. It has been discussing rent deferrals with its tenants, which typically hold short leases of about two years, and more recently has cut its rates in half for businesses affected by lockdown restrictions.
Secondly, there is a strong likelihood that the next valuation of its £2.4 billion portfolio will be marked down in the light of the pandemic and the shortness of its tenancies. In the longer term, its vacancy rate looks vulnerable as companies either fold or move, tenants that it could struggle to replace. It normally agrees between 120 and 130 lets a month.
On the other hand, its balance sheet is healthy and it is not highly geared. Its office spaces tend to be self-contained, unlike many competitors, a relative safeguard against contagion that prospective tenants might actively seek out.
The shares, up 1p, or 0.1 per cent, higher at 732p last night, trade at a discount to the valuation of its assets in September of about 35 per cent, far steeper than rivals. They may well be wobbly for a time yet, but are worth holding.
ADVICE Buy McCarthy & Stone, hold Workspace, avoid Bakkavor
WHY Just because a share is cheap doesn’t make it a bargain and in some cases offputting traits persist
