The ‘fortress firms’ best placed to weather the coronavirus crisis
As the corporate and economic toll of the coronavirus outbreak mounts, it is clear that some winners will also emerge from the crisis, including supermarkets and others such as Marks & Spencer, which are likely to be handed “essential retailer” status.
If the UK government follows in the footsteps of other countries such as France, where only supermarkets, pharmacies, banks, petrol stations and hairdressers are allowed to stay open, a handful of retailers could eventually benefit.
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Peel Hunt retail analysts John Stevenson and Jonathan Pritchard said it was clear that the big supermarkets will be allowed to stay open throughout the crisis, along with other big food players such as M&S. This, they said, will give the struggling retailer a much-needed boost, along with the expected business rates relief of £150m it is set to receive under the chancellor’s £330bn business rescue package announced this week.
McColl’s, which has more than 1,5000 convenience stores and newsagents across the UK, is also expected to handed essential status. Stevenson and Pritchard said: “Community retailing is even more valuable at the moment and we would expect these stores to be very busy.”
The discount retailer B&M, which has more than 600 stores and gets 40% of its sales from food, is also likely to stay open, along with Pets at Home, Britain’s biggest pet store chain, given its market share in pet food.
The books, newspaper and stationery chain WHSmith, which has hundreds of post offices in its stores and also sells some food, may also be deemed essential – but Halfords may not make the cut, as people will be driving less, the analysts said.
WHSmith was last week forced to issue a profits warning last week because of the pandemic. It has suffered a sharp drop in visitor numbers at its airport outlets around the world since the outbreak began in January.
The crisis has piled further pressure on British retailers, which had already had a torrid two years amid weak consumer confidence, a shift to online shopping and higher business rates and labour costs. Debenhams, the department store, has asked its landlords for a rent holiday, as shoppers have deserted the high street. If the government orders all but the most essential shops to shut, many more retailers are at risk of collapse.
Analysts at Jefferies said companies with strong, “fortress” balance sheets will be able to weather the storm while more indebted players will struggle. They screened more than 600 European stocks for their debt levels, cash flow and other measures of financial strength, and came up with seven names to back and seven to avoid.
Fortress companies include the UK’s largest housebuilder, Persimmon, which despite scandals around the quality of its homes and executive bonuses posted a profit of more than £1bn for the second year in a year recently and continues to generate plenty of cash.
The other “fortress” firms are the German software group SAP, Associated British Foods owner Primark, German sports brand Puma, Switzerland’s Straumann and Inficon, which specialise in tooth replacement and sensor technology respectively, and the UK’s Spirent Communications.
Companies with weaker balance sheets and/or cashflow problems identified by Jeffries include the French carmaker Renault, Domino’s Pizza and the British brewing and pubs group Marston’s.
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