Hospitality shares have taken a hit since the UK-wide lockdown created a financial nightmare for the hospitality industry. Does this mean hospitality shares are now cheap enough to make them a good buy? I’m not so sure.
Mitchells & Butlers (LSE:MAB) runs around 1,780 managed pubs, bars and restaurants throughout the UK. It has been hard hit by the coronavirus pandemic and Mitchells and Butlers shares are down 66% year-to-date. Last week the FTSE 250 company received a temporary waiver on its loan repayments, extended to 8 June. This inspired confidence and its share price gained 7% on the news.
The shares have a price-to-earnings ratio below 5. Its earnings per share are 33p and it has a 55% debt ratio. The FTSE 250 company has put over 99% of its employees on furlough and cut pay for its remaining employees and the board.
Covid consequences
Mitchells & Butlers brands include The Harvester, Toby Carvery, All Bar One and Miller & Carter chains. The hospitality sector is unlikely to restart before July and when it does, things will differ from before. To ensure social distancing measures are in place, it is likely that fewer customers will be permitted to establishments. This could cause prices to go up so that landlords can cover their overheads.
But that would mean fewer people will be able to afford to eat or drink out. Some people may also be fearful of going back to pubs and restaurants or to socialise for extended periods. For these reasons, I am not yet feeling bullish towards the hospitality sector.
Investing in wealth management
Wealth management may not be gearing up for high demand during a recession, but it is a cyclical business that will always have core clients.
FTSE 100 wealth management business Standard Life Aberdeen (LSE:SLA) has been minimally impacted thus far by the pandemic. Its staff have transitioned to home working with ease and it has a strong balance sheet that should see it through a stock market downturn. Assets under management and administration at Standard Life Aberdeen were estimated to be approximately £490bn on April 30.
The share price is down 32% year-to-date but it is up 29% since the March market crash. There is likely to be further volatility ahead though, so it is not a stock for those with a short-term outlook. However, as a long-term play, I think Standard Life Aberdeen will weather the storm.
It will take some time before the extent of the financial impact of the pandemic becomes clear. However, it is unlikely to make positive reading. With the country increasing its debt at an unprecedented pace, the Treasury and the Bank of England will need to seriously consider how debt restructuring can take place. Reviving the economy once the lockdown is over will be paramount and I imagine wealth management firms will play a part in the recovery. Standard Life Aberdeen has a price-to-earnings ratio of 20 and a dividend yield of 9%. I think this yield makes it an attractive share to buy today when so many dividends have been cut or cancelled.