The market sell-off that accompanied the spread of coronavirus to the UK and the lockdown measures caused a dramatic drop in share prices but among these ‘fallen stars’ there are a number of names that have the potential to ‘snap back’, according to brokerage Peel Hunt. 
From a list of 150 FTSE All Share and FTSE AIM 100 companies that have fallen by 40 per cent or more year-to-date, Peel Hunt has highlighted several with the opportunity for the “greatest snapback”.
“Clearly, there is a lot of uncertainty in this so we are looking at this as more of an opportunity to identify where we think the market is ignoring the recovery potential or overestimating the long-term threat to the business,” said head of research Charles Hall and deputy head of research Clyde Lewis.
The report is based on several assumptions: a broad loosening of lockdown by end-June, a gradual return to work and social distancing for the remainder of the year, pro-growth measures such as a reduction in value-added tax (VAT) or other taxes, longer support for furlough schemes, a gradual economic recovery and low growth in the UK.
Below, Peel Hunt analysts highlight several stocks they think could ‘snap back’ given these conditions.
Consumer: Bakkavor
Chilled food supplier Bakkavor has a 33 per cent market share of its key markets (meals, pizzas, desserts and salads) in the UK, which represents 90 per cent of its sales. While benefitting from the initial stockpile stage, the onset of social distancing and home cooking has resulted in reduced sales for the company, whose products are more suited to people with busier lives and a shortage of time.
“We have assumed that sales decline by 7 per cent in the full year, which equates to a 10 per cent decline in the last nine months of 2020,” Peel Hunt analysts said, noting that Bakkavor is reducing costs by furloughing staff and mothballing “some lines and potentially some sites”.
“Bakkavor should be in a stronger position than many of the smaller players, who have limited breadth of product and bank facilities,” they said. “Furthermore, the retailers will have grown to rely more on the major suppliers, who can flex production at times of stress,” they added.
While the company has cancelled its dividend and reduced capital expenditure, net debt is forecast to fall. On Peel Hunt’s reduced earnings forecast for 2021, the company is trading at a price-to-earnings (P/E) multiple of 6x.
Financials: Paragon
Buy-to-let lender Paragon has fallen on concerns over impairment levels despite having had a strong first half (to March) and growth in new lending flows. But it has decided not to pay its interim dividend and could see more borrowers asking for payment holidays.
“However, Paragon entered this crisis in a robust position,” said the Peel Hunt analysts, with the average loan-to-value at 67 per cent, diversified funding sources, conservative underwriting and robust balance sheets.
“Whilst new lending volumes are likely to reduce, this will be offset by lower levels of redemptions, suggesting that the loan book will remain steady, before any impact from impairments,” they said.
Nevertheless, Paragon is currently trading at a 40 per cent discount to its reported book value and the level of profitability is currently “overly pessimistic” about how it emerges from the crisis.
Performance of Bakkavor, Paragon & UDG over 3mths
Source: FE Analytics
Healthcare: UDG
Global healthcare service provider UDG has seen disruption due to lockdowns, posing challenges for in-field-based activity, which represents one-fifth of its earnings. Nonetheless, voluntary three-month pay cuts of 20 per cent for the board and executive teams alongside other measures have been put in place to cut costs.
“We believe that as a key strategic partner to all the major and mid-size pharma and biotech companies, UDG’s markets will see a boost from increased investment in healthcare in the medium-to-long term,” noted Peel Hunt.
Another company that suspended its interim dividend, UDG's business model is flexible enough to modest incremental investment, revenue and profit generation could return to near-normal levels even under a prolonged lockdown. “Therefore we believe there is very low risk of any cash crunch at UDG,” the analysts said.
Oil & gas: Tullow Oil
While acknowledging the recent crash in oil prices and the difficulty in forecasting them in the future, Peel Hunt analysts said supply cuts “will avert the doomsday scenario” of Bent crude falling below $20 per barrel for a sustained period of time. Furthermore, while the Covid-19 hit to demand has been massive, it should be temporary.
Tullow Oil is one of those companies that Peel Hunt believes could benefit from a recovery in oil prices. Having cut headcount by 35 per cent, the company is targeting $200m in savings from capital expenditure, operating expenditure and general & administrative expenses over the next three years. In addition, it has identified $1bn of disposals, not including the recent $375m sale of a development project in Uganda.
“If Tullow is able to achieve the full $1bn of disposals, the company has sufficient cash to pay down its maturing debt for the next five years,” Peel Hunt said.
Currently Tullow Oil is trading at around 50 per cent discount to its core net asset value, the analysts noted.
“The market therefore appears to be pricing-in significant risk that the company will not be able to pay down its debt, and that equity will collapse to zero,” they said. “However, following the significant Uganda disposal, we now believe this scenario is unlikely.”
Retail: Halfords
Automotive retailer and repairs company Halfords has remained open through the lockdown, having been classed as an ‘essential’ retailer. Nevertheless, around 30 per cent of its stores have been closed and those still open are adopting a ‘dark stores’ strategy, with shoppers unable to browse.
While sales are expected to be down by a quarter this year, the group will be in a better position than many ‘mom and pop’ cycle stores and garages, Peel Hunt said.
“Halfords was in the process of reconfiguring its store portfolio,” the analysts noted. “With more and more properties likely to become available, and landlords likely to be kinder on rent, the post-lockdown situation could be helpful to the existing strategy.
“We may well continue to dive less, which is bad news, but then again we are probably going to cycle more, which is good news: these longer-term trends probably play out a draw,” they added. “We had seen major signs of strategic progress here before the Covid-19 crisis hit. If Halfords can get back to that mindset, the shares could be very cheap. They are oversold anyway.”
Technology: accesso
Ticket and queueing technology operator accesso saw its share price hit following the closure of theme parks, museums and venues around the world as part of lockdown measures. The company took immediate action to limit the impact including a company-wide salary reduction in place of staff cuts.
“This is important to note because its staff are vital to its success,” Peel Hunt analysts said. “It needs to ensure it keeps its key software developers, and rehiring them on the other side would be difficult.”
There are still a number of measures that the company can make to cut the cost base, but clients are likely to need the technology provider more than ever once lockdown conditions end.
However, a ‘new normal’ may emerge for which the company would be well-positioned.
Volumes at theme parks may be tempered once lockdown conditions end as social distancing becomes common, while parks will have recoup more revenue per guest leveraging other of accesso’s identity intelligence products. In addition, consumers may be willing to spend more to ensure their social distancing preferences. Finally, its queueing technology may be needed by new customers, such as supermarkets wishing to implement new forms of queueing.
“Before its 2018-2020 fall the company was trading on a 2019 EBITDA [earnings before interest, taxation, depreciation and amortisation] of 19.5x,” the analysts said. “Today it is trading on 2x 2019’s EBITDA, which is an example of a year that accesso could recover to once we are through the crisis, so valuation should be somewhere in between.”
Performance of Tullow Oil, Halfords, accesso & Whitbread over 3mths
Source: FE Analytics
Travel & leisure: Whitbread
Budget hotel and restaurant group Whitbread – which owns brands including Premier Inn, Brewers Fayre and Beefeater – has seen all its hotels close apart from those accommodating front-line workers.
“A majority of staff are on furlough on full pay, with the company making up the difference between the government support package and actual pay,” Peel Hunt said. “Repair and maintenance have been reduced to the minimum required to meet health and safety requirements.”
Both Whitbread's chief executive and chief financial officer have taken temporary 30 per cent pay cut and the board and executive committee have taken 20 per cent reductions, while senior-level bonuses will be paid in shares and not in cash.
“In the initial post-lockdown period we expect domestic hotels to see a spike in demand followed by a return to normal hotel cycle pattern of a recovery in occupancy followed by a recovery in room rate, leading to a gradual recovery in overall revenue,” Peel Hunt explained.
“When the lockdown ends we expect Whitbread will gain market share as it is better placed than some competitors to dive market share with attractive pricing.”
While shares are 50 per cent above the market sell-off low point, they are still half their pre-Covid-19 levels, according to Peel Hunt
“On a profit forecast of a full recovery, the shares are trading on a P/E ratio of 15x and we believe they will trade up to 20x as the recovery becomes established,” it added.