Clarity and Confusion

Now that we are taking the first steps out of lockdown, at least in England (and if you are able to get out for some golf, I am very jealous but, do enjoy!) the stock markets seem to have done a bit of ‘travelling and arriving’.

The clarity of removing restrictions has been replaced by the uncertainty of how it will operate and how long it will take. And it is not just in the UK, there is plenty of confusion elsewhere.

When lockdown procedures to combat Covid-19 started to be put in place in March, in the West, stock markets went into a tailspin. An inability to do business is obviously the most draconian threat to any company and the first thoughts were ‘can the company survive this’.

The robustness of the companies, strength of balance sheets, strength of management and certainty of cash flows, are a key consideration when we select for the AIM portfolio.

Company survival prospects during lockdown

We considered that all companies in our AIM portfolio should be able to survive an extended period of lockdown, even those in the leisure sector where business stopped overnight.

Young & Company, the premium pub chain, who drop right into this category, reported this week that their borrowing facility had been increased to £285m. As almost all staff have been furloughed, business rates suspended and most pubs are owned, their cash costs have been radically reduced and they should be comfortably able to survive. The news was well received by the market.

Dart Group, who operate Jet2 flights and holidays, similarly are unable to work. Their share price fell dramatically on Tuesday, we think because of a confluence of negative news stories on holiday travel, although it has one of the strongest balance sheets in the business. They have just announced a £300m COVID Corporate Financing Facility with the Bank of England, should it be required. Again, we see Dart as a survivor and winner from the current turmoil.

Our only company to have raised capital through the equity market is Scapa Group, a diversified healthcare and industrial company. They were unfortunate in having a major contract terminated (and now the subject of litigation) in the middle of last year and were actively seeking new work when Covid-19 struck.

Although significant cost cutting efforts were already underway, they estimate that sales for the current financial year will be 20% less and profits 50% less than originally budgeted.

A share placing to raise £30m was undertaken very swiftly and without any real discount to the existing share price.

It is heartening to see the stock market functioning as it should, allowing companies to quickly and effectively raise capital to bolster their financial strength enabling them to survive and then prosper.

As a bit more clarity emerges on how and when we walk back from current restrictions, we expect more favourable outlooks to be factored into many of our companies. For now, at least I’m allowed out to exercise more than once a day and can start to offset the impact of my biscuit habit!

Matt Strachan – Chief Investment Officer Thorntons Investments

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