"The creation of the joint venture is an important step forward for our UK business. The joint venture's brand portfolio will allow us to offer a significantly stronger beer portfolio to our UK customers. In addition, the combined business will bring our customers wider choice, greater capacity, product innovation and marketing and distribution efficiency benefits." Cees 't Hart (Chief Executive of Carlsberg Group)
Friday 22nd May saw an incredible share price rise for Marstons plc (MARS)*. The British Pub Company had seen its share price hammered by the Corona Crisis, as it was forced to close all its pubs in mid March 2020. From 70p a share on March 11th, it was trading at 32p on May 21st. The jump to 66p on May 22nd was little short of remarkable. Only Carlsberg could script such rises for a major listing....
This week also saw a great rise for Dart Group (DTG), the airline, package holiday and logistics company. From a price of £4.72 on May 15th, it now trades at £6.81. The reason? A significant oversubscribed placement of new shares raising £172 million from its main investors with no discount.
There is a brutal reality to what is going on at the moment. I spoke to an insolvency practitioner this week and he has already dealt with the insolvency of a meat supply business to the hospitality sector and a coach firm that supplies schools and excursions. The common theme? The collapse in the leisure sector and income falling to near zero. The sad truth is that there will be many more. Now is a good time to be specialising in selling distressed assets- provided always that there is a ready buyer for them.
And that is the interesting point here. In the case of both Marstons and Dart, there were "ready buyers" for their stock, who clearly see good futures in those companies. As investors we are left with the question, is now an opportune time to dip into the leisure sector? Should we be those "ready buyers"?
Now when I talk of the leisure sector, I am referring to pubs, bars, restaurants, hotels, holiday companies, gyms, airlines and the wider travel industry. In short in the UK since mid March, people have been prevented from leaving their homes and leisure operators have been required to largely cease operations. This has led to income dropping to zero in many cases. Without deep reserves or access to capital by way of the Market or Government loans or grants, cashflow has become incredibly tight. There are still creditors that need to be paid, even with many employees on furlough.
I was listening to a stock picker I respect a lot last weekend who had formed the view that share in pub companies were still over valued. His belief was that the Market had not fully factored in the impact of social distancing when pubs re-open. He pointed out to the margins that companies like JD Wetherspoon (JDW) enjoyed was only 7% and depended on pubs being full at weekends. If social distancing meant that they could only be half full then the margin disappeared and pubs could very soon be trading at a loss. The other category that gave him concern was the premium suppliers namely Fevertree (FEVR) and Diageo (DGE). Their profit was made more from on-trade rather than supermarkets. Furthermore if we are in for a prolonged downturn then people will switch from premium drinks to cheaper brands.
It is very challenging indeed to assess what a company is truly worth in the present Market. Most results that are coming out now report from a different era. I suppose my approach would be based on the following:
- Does the Company have a strong enough balance sheet to weather the more pessimistic forecasts ahead?
- How long can the Company survive with no or reduced cash flows?
- What is the debt position of the Company?
- Has the present Share Price factored in all of the likely scenarios? I.e. if profit is halved or erased then are the shares worth their present quotation
- How quickly can the core business bounce back from the present situation remembering it is not just about Government restrictions being eased, but also about the general public being confident enough to venture out again and spend?
- With all the above factored in, assuming an otherwise even trajectory and good management is the return from the Company likely to represent a good risk/reward return?
In conclusion, it is my view that it is always worth looking closely at "beaten up" sectors like leisure in times like this. There will be diamonds amongst the stones and there will be some big rewards. As ever careful analysis will reward the patient investor.
*This article is published subject to my usual disclaimer