Robert Stephens, CFA, discusses the prospects for two FTSE 350 laggards – Rolls-Royce and Shaftesbury.
The FTSE 100 and FTSE 250 have experienced stunning recoveries since their March 2020 lows. Indeed, the FTSE 100 currently trades within 8% of its level from prior to the pandemic, while the FTSE 250 has now surpassed its all-time high following recent growth.
However, not all UK-listed stocks have experienced such rapid recoveries. The challenging outlook for the airline sector means that Rolls-Royce (LON:RR) trades 50% lower than its pre-Covid level. Meanwhile, lockdown measures continue to impact negatively on REITs such as Shaftesbury (LON:SHB), which is down 30% on its level from February 2020.
Both companies could offer relatively good value for money as they deliver on their strategies. While risks and volatility are likely to be high, they may benefit from an economic recovery.
Travel restrictions led to a 29% slump in Rolls-Royce’s revenue in the 2020 financial year. As a result, the aerospace and defence company’s underlying net profit of £306m in 2019 became a £4bn loss in 2020.
Investors have understandably remained cautious towards the stock. The increasing prevalence of Covid-19 cases across the world means that lockdown measures, including the grounding of aircraft, could remain in place in the coming months.
In response, Rolls-Royce has strengthened its financial position through debt and equity raisings so that it has £9bn in liquidity. It also plans to make asset disposals of around £2bn, while cost reductions saved the company £1bn in 2020 versus 2019 levels.
In addition, the firm is continuing with its restructuring plans. Around 7,000 roles were removed in 2020. As well as removing costs, these changes could create a leaner and more flexible business that can capitalise on a long-term economic recovery.
When this takes place is clearly impossible to determine. High share price volatility, further losses and weak investor sentiment could remain ongoing threats to the company’s near-term outlook.
However, as vaccine rollouts continue and lockdown measures are eased, the airline sector could benefit from pent-up consumer and business demand. This could catalyse Rolls-Royce’s share price over the long run.
Lockdown measures have severely impacted Shaftesbury’s recent performance. The owner of a 16-acre property portfolio in London’s West End reported in February that it collected just 45% of the rent owed in the quarter ending 31 December 2021. In addition, around 10% of its estimated rental value is currently vacant.
The unwinding of lockdown measures in the coming weeks could have a positive impact on the firm’s performance. During the pandemic, savings rates among UK consumers have reached record highs. At least a portion of these savings could be spent on leisure activities that represent a novelty after a long period of containment measures.
Furthermore, forecasts for the fastest economic growth rate on record in the remainder of 2021 may stimulate demand among businesses for Shaftesbury’s varied locations. The company’s available liquidity of £358m suggests it has the financial means to overcome further short-term risks.
Of course, a lack of international tourism and potential changes in behaviour post-Covid remain real threats to the firm’s prospects. However, Shaftesbury’s price-to-book ratio of 0.85 indicates that those risks may be adequately priced in ahead of a potential recovery in the long run.