Top UK leisure and domestic tourism stocks to watch as lockdown eases
Leisure stocks are hoping to bounce back when lockdown measures are eased and they can reopen, but can they operate profitably and adhere to the rules? We look at which stocks could thrive and those that could struggle to survive.
What is the impact of coronavirus on the UK leisure industry?
The leisure industry has been among the worst hit by the coronavirus. Pubs, restaurants, cinemas and practically all other leisure activities have been shut for months during lockdown.
The FTSE 350 Travel & Leisure index, which also includes the ailing airline, cruise and transport industries in addition to the largest leisure stocks, is still trading nearly one-third lower than pre-coronavirus levels – underperforming versus the wider FTSE 350.
The index’s attempt at a recovery is being driven by the anticipation that leisure outlets will be allowed to reopen soon. The current plan – which is not set in stone and subject to review – is to begin reopening the leisure industry on 4 July, when the UK hopes to enter the third phase of its lockdown easing measures.
Both the industry and government are eager to get leisure activities back on the agenda. The vast majority of people that work in the sector are currently furloughed and being paid by the public purse, and the government is keen to get them back to work.
It is also aware that, like the hospitality industry, the longer the industry is forced to remain closed the deeper the permanent scarring will be in terms of closures and job losses.
However, the government is also aware that giving the green light to the leisure industry – which is based around providing the complete opposite of social distancing - runs the risk of flaring up the rate of infections.
For example, investigations have suggested events at Cheltenham Racecourse and Liverpool Football Club caused the virus to spread significantly before the country started to react and introduce containment measures.
Can leisure stocks operate profitably when they reopen?
The majority of the leisure industry look likely to open sooner rather than later, but the big question now is whether or not it can operate profitably so long as social distancing and other measures are in place.
For example, two-metre social distancing means pubs could operate at less than half their usual capacity, making it practically impossible for them to operate profitably, while others have said the rules will ruin the experience and atmosphere that leisure activities usually offer.
Some businesses have warned customers may be slow to return even when they do fling open the doors as consumers remain cautious over going out and socialising whilst the virus is still around. Volumes are key to many leisure companies and it has to face the fact they will have to operate at a reduced capacity for some time.
Will the UK suffer from lower levels of tourism?
The UK leisure industry benefits hugely from the number of foreign visitors that visit the country every year, so there are concerns that restrictions and reduced appetite for international travel and holidays could hit leisure destinations, whether that be theme parks, casinos, museums or pubs.
However, Brits are big spenders when they head abroad and, with most planes still grounded and an overseas break off the cards for the foreseeable future, there is a chance that the leisure industry could benefit from people being forced to enjoy more time in the UK rather than elsewhere.
This might not only mean a resurgence in the staycation, but also filter through to increased spending on other leisure activities to make up for the lack of a holiday.
But the industry will be wary as many will be solely relying on UK visitors, as foreign tourists will be hard to find anytime soon. Still, foreign visitors spend about £20 billion annually in the UK, but Brits spend over £72 billion on domestic day and overnight trips.
All-in-all, the data, from Visit Britain, suggests the UK leisure industry could be a net beneficiary from the lack of international travel and the resurgence in UK breaks.
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Top leisure and domestic tourism stocks to watch
The complex outlook for the leisure market means investors and traders need to identify segments that have the potential to function properly and get customers through the doors, as well as those that could struggle to work in the new world we find ourselves in.
With their businesses at a virtual standstill, most of the industry has had to ask banks for extra flexibility or debt, raise equity from investors and cut dividends and spending in order to bunker down.
Clearing the additional debt they’re having to take on to survive will be the priority once business starts to return to normal, which means payouts don’t look likely to return anytime soon.
The sector does not boast financial strength nor a bright outlook, and this is reflected by the performance of share prices compared to the wider market. Still, with share prices depressed, there will be some that will come back stronger and can therefore be considered cheap right now.
We have a look at five stocks that could fare differently as lockdown is eased.
After selling Costa Coffee to Coca-Cola, Whitbread is now solely focused on its restaurants and budget hotels – all of which have suffered during lockdown. Its sites, under brands including Premier Inn, Beefeater and Brewer’s Fayre, are concentrated in the UK, but it has embarked on an aggressive expansion plan to open up 30 hotels in Germany by the end of 2021.
Whitbread started a new financial year at the start of March, just weeks before lockdown measures were introduced, and all of its sites were forced to close. It has already cancelled its dividend, raised £1 billion from investors in a 1 for 2 rights issue, and secured some flexibility from the banks. ‘We have enhanced our liquidity position and agreed a range of covenant waivers that mean we are able to withstand many months of our hotels being closed or at low occupancy. We are ready to re-open quickly and safely, and the business is well positioned to return to strength,’ said Whitbread on 21 May. It has already put new procedures in place, like enhanced cleaning.
Its German hotels have already reopened, and it says its UK ones are ready to go once the government allows. However, it is assuming that its hotels will remain ‘closed, or at low levels of occupancy, until September 2020’. Still, Whitbread believes it will fare better than its rivals and will therefore be able to deliver a ‘strong return in a weakened competitor environment’.
As for its pubs and restaurants, the main challenge will be maintaining the experience these venues usually offer when socialising is limited. You can read more on what the outlook for pubs and restaurants looks like post-lockdown here.
Where next for Whitbread shares?
Whitbread shares followed the market by reaching a new low on 19 March, but, whilst much of the wider market has started to stage a recovery, Whitbread shares have failed to claw back much ground.
They are trading over 40% higher than those lows but they are still 39% lower than the start of the year. As of 10 June, Whitbread boasted an average broker rating of Hold, while 83% of IG clients were long on the market and expect the share price to rise.
Cinemas have the potential to perform well once they reopen compared to other leisure activities. Social interaction is minimal, and the experience of the film shouldn’t be overly affected by social distancing.
Each screening will have to accommodate fewer people, and most already have pre-booking apps and other technology in place that minimises human contact. The demand for food and drink and the way it is served will be key as this represents a huge chunk of revenue. Cineworld makes 28% of its revenue from selling popcorn, drinks and other treats.
Cineworld, now one of the largest cinema chains in the world after acquiring US chain Regal in 2018, said in May that it expected to be able to open ‘in each of its territories by July’.
Although Cineworld is the only UK-listed cinema company, it makes just 15% of its revenue in the country (plus Ireland), with the acquisition of Regal meaning it now makes almost three-quarters of all revenue in the US. The situation with lockdown in the US is far more complex than the UK, with it largely being managed on state-by-state basis with guidance from the federal government.
Cineworld is saddled with a large amount of debt following a string of acquisitions – including the purchase of Cineplex that is still being completed – but it has secured additional liquidity and waivers from the banks.
This means it has enough headroom to ‘support the group even in the unlikely event cinemas remain closed until the end of the year’. Dividends have been suspended and are unlikely to return until its debt is addressed.
Still, Cineworld is hoping to bounce back strongly as it reopens theatres thanks to a ‘great movie line up’, starting with Christopher Nolan’s spy film Tenet and Disney picture Mulan.
It is worth noting some possible long-term ramifications of coronavirus for the industry. One of the biggest is how films are released. Many films that would have usually been released in cinemas have been sold or rented to people through their televisions and, if that proves successful, then cinemas could start to see their overall role become redundant, and those fears are only being compounded by the fact companies like Disney have launched their own streaming services.
A reduced film slate, or even just a poor season, would not only deal a blow to ticket sales but to the revenue cinemas generate from advertisements and previews that are shown before films.
Where next for Cineworld shares?
Cineworld shares have experienced some severe ups and downs in 2020. They lost over 90% of their value between the start of the year and 17 March and have since trebled in value.
Still, shares have failed to recover most of the value lost this year and are trading nearly 60% below pre-crisis levels. Cineworld currently boasts an average Buy rating from brokers and 88% of IG clients are long as of 10 June.
The outlook for Rank Group is not bright. It is the owner of the Grosvenor Casinos and Mecca bingo halls, with operations also in Spain and Belgium.
Casinos are hubs of activity and social interaction and there are fears they could lead to the virus spreading.
Images from Las Vegas, which opened in early June after 78 days of being closed, showed a flurry of people returning but little care for social distancing, face masks or other preventative measures. Rank Group does have a digital arm, bolstered by its acquisition of Stride Gaming, and it has become one of the fastest-growing parts of the business, but it still makes the vast majority of its income from its casino and gaming halls.
The UK gambling scene is very different from Las Vegas, and Rank Group is not expecting a stampede of customers to be banging on the door. ‘Whilst we have limited forward visibility and with it the likely pace of recovery, we are preparing for difficult trading conditions when we reopen our venues businesses,’ it said in April.
Rank Group has taken action to shore-up the balance sheet to ‘ensure that we withstand this crisis and re-emerge as a strong business’. It has secured additional debt and waivers, deferred tax payments and slashed its running costs.
It is currently costing the business £10 million every month it is closed, but that is down from £17 million when the crisis started. Shareholders have had to contribute too and the dividend that was expected to be paid in October 2020 has been scrapped.
Rank Group has warned it ‘does not intend to recommend a dividend unless all creditors, directly arising from group actions to mitigate the economic impact of Covid-19, have been resolved and we have the necessary visibility on future cashflows following the reopening of our venues.’
A better option for investors could be gambling stocks with a substantial online presence. 888 – which is solely online – seems to have been largely unaffected by the crisis so far, even if the lack of sports has hurt the entire industry.
It has also managed to maintain its dividend as a result and was recently added to the FTSE 100. 888, along with other gambling stocks like GVC Holdings and Flutter, have all seen their share prices recover from the lows seen in March at a much better rate than Rank Group.
Where next for Rank Group shares?
Rank Group shares lost almost three quarters of their value before hitting a low on 19 March. Shares have almost doubled in value since then but still trade over 40% lower than before the crisis unfolded. Four brokers have an average rating of Buy on the company, and 96% of IG clients with open positions are long as of 10 June.
Hollywood Bowl, the ten-pin bowling alley and mini golf operator, is eager to get back up and running. Again, reduced capacity looks likely to be the key problem but the activity itself shouldn’t be overly compromised by social distancing.
The company is prepared to reopen and has introduced alternate alleys, pre-booking systems, queue control measures and moved its dining area and gaming machines around. It’s opening hours and menu will be reduced.
The company has scrapped its dividend, cut costs, secured additional debt and raised £10.5 million in a heavily discounted placing to ensure it has the resources it needs.
Its long-term ambitions have not changed as a result of the coronavirus. It still plans to open at least two new outlets each year (on a net basis) and has ten new sites in the pipeline that will be opened by 2024.
It launched its first mini golf site, Puttstars, just before the lockdown was introduced and although it hampered the launch it is still confident about its prospects based on the initial performance. A second Puttstars site in Rochdale is ready to open when lockdown is lifted.
Where next for Hollywood Bowl shares?
Hollywood Bowl shares lost 74% of their value as they collapsed to a low in March. The share price has more than doubled since then but still trade 37% lower than at the start of the year. Six brokers currently have a Strong Buy rating on Hollywood Bowl, while 95% of clients with an open position are long.
Arena Events Group
Arena Events Group is a turnkey infrastructure provider for major events. This means its supplies everything from temporary structures and fencing to seating and catering for sporting, commercial and cultural events.
It has understandably been hit hard by the lack of sport and cancellation of major music and other events, while corporations have also stopped mass gatherings of employees.
These are likely to be the very last type of events that will be reintroduced as mass gatherings pose an obvious risk to starting a second wave of infections, so the outlook is particularly uncertain for the company.
Arena Events Group said its business had been largely unaffected until it started its new financial year at the end of March, when it started to see ‘a wider pattern of larger event cancellations’. Whilst it has tried to adapt by supplying temporary structures for Covid-19 operations it simply won’t be able to recover until major events are allowed to go ahead.
‘While the group has started to see an increased level of enquiries for equipment to help corporates enact disaster recovery plans, and structures to help local and national authorities handle the need for temporary support facilities, it is currently unclear as to the extent these will offset a prolonged period of event deferral and cancellation,’ it said in March.
Arena Events Group has secured additional headroom from its banks and raised £9.5 million at 10p per share to bolster its balance sheet, and says it has enough cash to ‘for the foreseeable future’.
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