3 FTSE 100 shares with turnaround potential despite Covid-19 risks

Robert Stephens, CFA, discusses the prospects for three companies that are set to report falling sales due to the Covid-19 pandemic.

The Covid-19 pandemic has caused widespread disruption across the UK economy. Sectors such as retailing, travel & leisure, and housing have essentially shut down for as long as it takes to flatten the curve of new Covid-19 cases.

The effect of this on companies operating within those sectors is likely to be severely negative in the short run, despite government support such as the jobs retention scheme. However, low share prices for dominant companies in an industry could mean buying opportunities for the long term, in my opinion.

Retailing

Primark owner ABF (LON:ABF) announced on 23 March that all of its Primark stores had closed due to Covid-19 concerns. It expects to miss out on £650 million of net sales per month. Cost reductions could help to ease the total losses incurred from store closures, but the business looks set to experience a challenging period that has been reflected in a 25% drop in its share price since the start of 2020.

The remainder of ABF’s diverse business model that encompasses sugar, ingredients, grocery and agriculture has been largely unaffected by Covid-19 so far. Together with its net cash position of £800 million and credit facility of £1.1 billion, this suggests it could emerge from the Covid-19 pandemic in a stronger position than some of its retailing sector peers.

Upcoming results mean that ABF’s shares could be volatile in the short run, but they may offer long-term recovery potential.

Travel & leisure

The UK’s lockdown means that Whitbread (LON:WTB) closed all of its pubs and restaurants on 20 March, with its hotels following suit just a few days later. Its revenue is, therefore, likely to plummet in the short term. It may also breach its financial covenants, according to its investor update, depending on how long the current lockdown lasts.

The firm has deferred its dividend, reduced unnecessary investments, and is set to save £120 million in business rates relief in the 2021 financial year. Even so, its shares have declined by over 50% in 2020, as investors plan for a difficult period for the wider industry that is likely to lead to major challenges for incumbents.

On a risk/reward basis, Whitbread could offer long-term investment appeal. Its wide economic moat, dominant position in the budget hotels sector, and the margin of safety included in its share price could make it an attractive, yet risky, proposition on a multi-year time horizon.

Housing

The housing market is essentially paused during the lockdown. Therefore, property listings website Rightmove (LON:RMV) has cancelled its dividend and is discounting its customer invoices by 75% through to July 2020. This may help many of its estate agency customers to survive a severe drop in their revenue.

One of Rightmove’s main draws as an investment is its dominant market position. It is the clear market leader in an industry that is likely to return to strong growth over the long run, as searching for a home becomes increasingly digitalised.

Therefore, buying the stock at its current 30% discount to its pre-Covid-19 price level could be a rewarding decision. As with Whitbread and ABF, Rightmove is likely to experience very challenging trading conditions that may last for many months. Its risks are high, but its prospective rewards over the long run could be relatively attractive.