Will the great pub return be a tonic for investors?
THERE could be a few ‘Super Saturday’ hangovers t his morning after many of the UK’s pubs, bars and restaur a nt s o pened t hei r doors yesterday after months of lockdown. But will the re-opening of the hospitality and leisure sector bring opportunity to investors or just lead to a hangover of a financial kind instead?
From alcohol companies to pub chains, restaurant groups, hotels, campsites and cinemas, there are many listed companies – and funds which hold them – which, in theory, should benefit from the lifting of lockdown. But experts are warning that the celebratory fizz could quickly turn flat.
Russ Mould, investment director at AJ Bell, says investors should look at their own reaction to the lifting of lockdown restrictions.
He says: ‘The first question that anyone must ask themselves is how willing will they themselves be to return to the pub, restaurant, bar, cinema, gym or bowling alley?
‘You are trying to predict how other people will behave and your own views are one benchmark for that, but not the only one. Some may be keen while others not interested at all, either out of health concerns or financial ones if they have been furloughed or lost their job.’
While listed pub companies such as JD Wetherspoon – seen as wellplaced for social distancing thanks to its popular table service app –
Young’s, Marston’s and Mitchells and Butlers will see tills ringing this weekend for the first time in months, the missing months plus the extra costs to re-open could take their toll.
Mould says: ‘New rules on social distancing and the increased costs – such as for screens, sanitisers and personal protective equipment – mean many business models could remain challenged. These are businesses which need high turnover of customers and high use of their assets, be they hotel rooms, bowling alleys or restaurant tables.
‘It could be a long haul back to pre-Covid-19 business levels, especially if a second wave strikes or local lockdowns are necessary.’
Share prices of some companies impacted by the UK’s own ‘Independence Day’ have already started to respond. Since the UK stock market bottomed on March 23, shares in cider firm C&C are up 53 per cent, Cineworld (57 per cent), JD Wetherspoon (55 per cent) and
Rank by 42 per cent. But Mould says these stocks are still all down on their value on February 20 when the Covid-19 rout of share prices began in earnest.
He adds: ‘ It may make sense instead to focus on those firms that have raised cash to bolster their balance sheets, or had sound finances in the first place and have a strong brand and market position, so they can tough out difficult times.’
Mould points to leisure giant Whitbread, owner of Premier Inn, Beefeater and Brewers Fayre, Fuller’s – which no longer brews but runs hotels and pubs – and Marston’s where a recent deal with Carlsberg brought in welcome cash.
Jason Hollands, of wealth manager Tilney, strikes a cautious note. ‘For landlords, restaurant owners and hotels, it is a chance to start generating s o me desperately needed cash flow,’ he says. ‘But I would caution against viewing this as a great investment opportunity.
‘These businesses have been hard hit by lockdown and are fighting for survival. Outdoor socialising will work for pubs and restaurants over the next few months but when the nights get darker earlier, unless social distancing is scrapped altogether, lots of these businesses are going to find themselves back in trouble.’ Like AJ Bell’s Mould, Hollands likes Whitbread which completed a £1 billion rights issue on June 10 – and also AIM-listed Young’s which recently raised £88.4 million in new shares. He adds: ‘A less risky play is Guinness-owner Diageo as it should benefit from the reopening of pubs while also selling its products in supermarkets and retailers.’
Church House Absolute Return Strategies investment fund owns both the debt and the equity of Diageo. Manager James Mahon says: ‘Diageo was one of the first companies out of the blocks when the credit markets started to open up. Seeing that a good quality company like Diageo could raise money helped lots of other issues to the market.’
Ben Yearsley, a director of Shore Financial Planning, says it is crucial not to look purely at the short term. ‘Capacity is clearly going to be the key issue for all these re-opened businesses and whether they can make money with only half their previous clientele,’ he says. ‘That’s why the likes of Diageo, mixer company Fevertree and Chapel Down wine may be better bets.’
AXA Framlington UK Mid Cap fund owns AIM-listed Fevertree. Manager Chris St John says: ‘I’ve used market pull back as an opportunity to buy the holding and then add to it. I’m happy to be patient with t he business – to l et it develop.’
This all adds up to a picture which isn’t for the nervous investor.
Darius McDermott, managing director of Chelsea Financial Services, says: ‘Where businesses survive there may be opportunities to make big investment returns, but some businesses are likely to go bust. Picking the winner in a sector is going to be vital and you have to look at companies on a case by case basis.’
Some companies are dividing opinion. Nationwide cinema chain Cineworld is, in Yearsley’s view, ‘a company that might not be as popular as many think – capacity will be way down, so we could see summer blockbusters with probably a quarter of the usual audience and no pick and mix.’
But Martin Cholwill, manager of fund Royal London UK Equity
Income and an investor in Cineworld, says: ‘ Social distancing shouldn’t be too hard in cinemas as they are usually only at 20 to 30 per cent capacity. The July new film releases should coincide with re-opening too.’
Fund Marlborough Multi Cap Income also owns Cineworld. Manager Siddarth Chand Lall says: ‘The company has agreed facilities for additional loans to ensure it can survive even if cinemas remain closed for the rest of the year.
‘In fact, Cineworld expects to be reopening sites globally by the end of this month with confidence around booking and seating reconfigurations to allow Covid-19 social distancing norms.’
Companies which have used lockdown to streamline their operations could be ones to watch out for, says Leigh Himsworth, portfolio manager at Fidelity International. He says: ‘Some companies have used lockdown to review their operations to become leaner and more efficient businesses, such as Restaurant Group with Wagamama.’
Like other investment experts, he offers a note of caution. He says: ‘While the re-opening is welcome news, I fear we have a long way to go before normality is restored.’
It could be a long haul back to pre-Covid business Some companies will have become leaner in lockdown