Which hospitality and leisure stocks do investment company managers like best?
With household savings at record levels and rising consumer confidence, prospects look bright for the UK hospitality and leisure sector.1 Many of us will be looking forward to trips to restaurants and pubs with friends, or even a holiday abroad, but with COVID cases still high in many countries around the world, uncertainty remains as restrictions are lifted.
Which travel stocks, hospitality chains and leisure groups have the brightest prospects as the UK emerges from lockdown? The Association of Investment Companies (AIC) has asked investment company managers about the outlook for companies such as Mitchells & Butlers, Wizz Air and Restaurant Group, owner of Wagamama and Frankie & Benny’s.
Which stocks will benefit most?
Katen Patel, Manager of JPMorgan Mid Cap Investment Trust, said: “We have a number of holdings that should benefit from pent-up demand for hospitality services, including Mitchells & Butlers, a leading UK pub operator, and Rank Group, an operator of bingo halls and casinos – both companies were trading well before the pandemic hit and are attractively valued. National Express, which operates public and school bus services, has already started to benefit from the easing of restrictions including schools and offices reopening. Thanks to a strengthened balance sheet, National Express is also winning new business across the globe.
“Although the easing of international travel restrictions is not clear yet, we would expect Wizz Air and Jet2, both with strong balance sheets, to take market share in the European airline and package holiday space respectively, whilst also continuing to benefit from structural growth in demand for air travel.”
Jonathan Brown, Portfolio Manager of Invesco Perpetual UK Smaller Companies, said: “Gym Group, the low-cost gym operator, should trade well on reopening as their customers are keen to get back into gyms and we believe health has increased as a priority for consumers. Many UK consumers have increased savings as a result of not spending on holidays, eating out and commuting. We believe there is pent-up demand to get back to normal leisure activities and expect strong trading as leisure opens back up.”
Thomas Moore, Investment Manager of Aberdeen Standard Equity Income Trust, said: “Coca-Cola Hellenic has exposure to countries in Southern and Eastern Europe and Africa which will be key beneficiaries of easing lockdowns as vaccines are rolled out. While tourism is unlikely to return to normal levels in 2021, there is scope for a year-on-year improvement. Coca-Cola Hellenic’s volumes were affected by the shutdown in tourism markets in summer 2020 and the recent poor ski season has further impacted sales. This sets the business up for an improvement in growth as these markets gradually return to normal.”
Hospitality and leisure to bounce back strongly
Neil Hermon, Fund Manager of The Henderson Smaller Companies Investment Trust, said: “We are optimistic about the outlook for UK-focused leisure stocks to perform strongly in the near term. With household savings at record levels, a highly successful vaccination programme, consumers keen to enjoy the level of social contact that they had pre-COVID and the likelihood of a staycation summer, we expect trade to bounce back strongly on reopening.
“Additionally, many of the companies we own in the portfolio will emerge stronger from the tribulations of the last year having raised additional capital from investors, as well as benefitting from a likely reduction in competitor activity as many rival businesses have downsized or stopped trading during the COVID-19 pandemic. Our exposure to these themes is provided by investments in Mitchells & Butlers and Young’s, the pub operators; Restaurant Group, the branded restaurant group; Gym Group, the leading operator of low-cost gyms; and Hollywood Bowl, the bowling alley operator.”
Katen Patel, Manager of JPMorgan Mid Cap Investment Trust, said: “Having suffered from over 12 months of severe restrictions, we believe the prospects for the sector on reopening are very positive with strong pent-up demand and considerable amounts of increased savings by consumers potentially waiting to be spent. Large parts of the hospitality industry and domestic travel sector should benefit from consumers spending in their home market. Over the coming months we would expect to see strong trading from pubs, restaurants and other parts of the hospitality sector from cinemas to casinos and beyond.
“We expect international travel to experience a slower return as governments seek to insulate their domestic economies from the risk of imported COVID-19 cases and variants, and vaccine rollouts across the globe occur at differing rates. However, consumers are desperate for foreign holidays and travel and the sector should bounce back strongly when restrictions are eased.”
Jonathan Brown, Portfolio Manager of Invesco Perpetual UK Smaller Companies, said: “The outlook for Gym Group has improved as some of its competitors have closed sites and the company is finding much improved site availability on attractive commercial terms – benefitting from spare retail capacity. This has enabled the group to enter towns where they had been historically struggling to find suitable sites, such as York and Cambridge.”
Emerging markets boosting demand
Thomas Moore, Investment Manager of Aberdeen Standard Equity Income Trust, said: “Coca-Cola Hellenic operates mainly in developing markets where consumption per capita is very low relative to developed markets. This provides ample scope for CCH to grow in the coming years. Their strong competitive position and robust balance sheet allowed Coca-Cola Hellenic to maintain its dividend throughout the pandemic. This will be remembered by investors, driving a valuation re-rating, aided by the cyclical recovery in volumes as tourism returns.”
Katen Patel, Manager of JPMorgan Mid Cap Investment Trust, said: “In recent times there has been a clear trend of increasing demand for experiential leisure, which combined with increasing wealth and the emergence of sizeable middle-class populations in emerging economies, can only be positive for the travel and hospitality sector. We believe a number of our holdings have increased the efficiency of their operations during this period and will undoubtedly have benefitted from capacity coming out of their markets which should mean more resilient and more profitable businesses in the future.”
Thomas Moore, Investment Manager of Aberdeen Standard Equity Income Trust, said: “Coca-Cola Hellenic’s management team has worked hard to control the cost base, paving the way for increased operational gearing once demand returns. They have also been working on new products, such as a ready-to-drink coffee range, following Coca-Cola’s recent acquisition of Costa Coffee.”
Katen Patel, Manager of JPMorgan Mid Cap Investment Trust, said: “As you would expect from any business facing a lengthy period of minimal revenue and no visibility, the priority has been to cut costs and preserve cash. A number of our holdings have chosen to raise money in the equity markets to ensure that they can survive an extended period of uncertainty and perhaps solidify their position as market leaders. Businesses have had to become leaner and more efficient, adapt to the new environment, and this should benefit profitability once restrictions are eased.”
Jonathan Brown, Portfolio Manager of Invesco Perpetual UK Smaller Companies, said: “Gym Group has reopened with alternate machines out of use to enable social distancing. At peak times this has decreased capacity – but the company now shows how busy gyms are allowing customers to visit at less busy times.”
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Notes to editors
In 2020 the UK household saving ratio reached a record high of 16.3% according to the Office of National Statistics’ Quarterly sector accounts, UK: October to December 2020, 31 March 2021. According to GFK, the UK Consumer Confidence Index reached -15 in April 2021, its highest level since March 2020.
The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment. Today, the AIC represents a broad range of closed-ended investment companies, incorporating investment trusts and other closed-ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help members add value for shareholders over the longer term. The AIC has 360 members and the industry has total assets of approximately £239 billion.
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