Many shares on the junior market, AIM, have been hit hard by coronavirus. These shares are often ‘jam tomorrow’ type companies, but even among the more established AIM companies, some share prices have dramatically slumped. Companies in hard-hit industries such as property, travel, oil and retail understandably have seen share prices freefall so far this year.
In March, the loss-making estate agent, revealed full-year revenues will be below expectations due to the coronavirus outbreak. The government lockdown it noted had specifically urged home buyers and sellers to delay to reduce transmission of the virus. No surprises there then!
The company has had to embrace digital viewings. It has also had to cut costs by furloughing staff, reducing marketing spend and reducing supplier and overhead costs. Again this is no big shock.
There may be pent up demand once the lockdown restrictions are lifted which could provide a fillip for the shares. For now though it’s clear that the Purplebricks share price has been one of the hardest hit by the coronavirus.
One other concern beyond the macro environment is the resignation of the CFO with very little notice. James Davies’ resignation was announced in mid-April and he left in early May. An unusually quick leaving period for a senior executive, which could be a warning sign.
The saving grace is his replacement Andrew Botha worked at the group which owned Zoopla, so has experience in the industry. Although according to LinkedIn he hasn’t done more than 18 months in either of his last two jobs – make of that what you will.
The CEO has also only been in place for a year. The non-exec directors all seemed to have joined at a similar time in 2018. Again, the high turnover at the top of the business could be a warning sign. People often don’t want to be associated with a company that’s going to go downhill under their watch, it’s not good for the CV.
Overall, Purplebricks’s share price may well bounce back strongly in the near future given the property market seems to be one of the first industries to start opening up again as lockdown rules are relaxed.
For income investors though the growing losses make the shares pretty unappealing. Long term, can it make a profit and become a dividend-paying share of the future? I’d argue possibly not and won’t be investing despite the collapsed share price.
Loungers is a café-bar operator, which means the lockdown imposed on UK businesses has hit it hard. Hence the dramatic share price in recent months, though it did do well in the first two months of the year. At the end of last year, the company was confident of opening new sites, had strong revenue growth of 22% and was even able to increase pricing. All in all a good mix.
The company was very quiet about the impact of coronavirus until early June, which I don’t think was reassuring for private investors. The company has now updated on its strategy, involving shifting to a takeout model. More information about that here.
Despite this development, I’d be worried if I was a shareholder. Intangible assets account for a huge amount of the group’s assets, while it seems to have little cash on the balance sheet. Current liabilities were greater than current assets which seems like a bad position to be coming into an economic crash in.
On the plus side, the founder has been buying shares at the deflated price which better aligns management’s interests with those of shareholders, and indicates confidence in the group’s future prospects. Founder, Alexander Reilley, has bought £589k worth of stock, at a price of 90p. Non-exec director, Robert Darwent has acquired three million ordinary shares for £2.7m this month.
Loungers is also a loss-making company making it unattractive for income investors. It will probably be a while now until the company is in any position to pay a dividend to shareholders. There may also be a question mark over whether it can emerge from this crisis in good shape given its financial position.
Dart Group (LON:DTG)
Travel is an industry that has been hard hit by coronavirus. Unlike Loungers, there has been a flurry of updates from Dart Group, owner of Jet2 airline and Jet2holidays and a distribution and logistics division, Fowler Welch.
The group has strengthened its balance sheet by tapping investors for £172m. It has said the placing was “substantially oversubscribed,” indicating there was demand for the shares. The board now believes they have the finance in place to ride out this crisis; presumably emerging in a strong position as less well-financed competitors fail. I believe them when they say that.
The upside of that of course is not all competitors will be able to get finance to survive this crisis and so Dart may pick up market share and emerge stronger from the crisis.
However, looking at now, the group has understandably pulled its dividend – like so many other companies – making it less than ideal for income investors. Another thing it has scrapped is forward guidance – again that’s not unusual in these times. Many companies far larger and with more predictable incomes have also taken this step and its not something to be particularly concerned about, at this time at least.
The bigger concern for me is that the executive chairman’s statement in the 2018/19 report was hardly optimistic.
“Both our Leisure Travel and Distribution & Logistics businesses have made satisfactory starts to the new financial year… it is clear from our forward booking trends that generally, less confident consumers are booking later than last year and therefore pricing for both our flight-only and package holiday products have to be continually enticing.”
I’m not surprised. When I flew with them from Stanstead to Lyon last year the plane was empty. I haven’t flown since but it didn’t fill me with confidence that the airline is popular. From my own experience, EasyJet flights are nearly always packed, potentially indicating, in just a very non-scientific way, that it’s better run.
If the business was not really firing on all cylinders in the good times, as the chairman indicates, it’s hard to fathom just how bad any results covering the last few months might be.
Combining a share price that’s not that cheap with a low dividend yield means the shares are not for me. Also, the group has huge current liabilities in its results to the end of March 2019 which is a concern. I’m staying clear of all travel and leisure businesses for the foreseeable future and see few reasons for optimism when it comes to Dart.
I’d have to say I think it’s understandable why all the share prices of all three of these companies have been hit hard. They all face big challenges, beyond the immediate problem posed by coronavirus. I wouldn’t invest in any of them but there are some AIM companies I like the look of, including recent investment Team17. Please keep an eye out for upcoming articles which will look at AIM shares with better prospects.
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Or read my previous article on FTSE 100 dividend stars.
UPDATE: After I originally published this article, Dart sold its logistics business, Fowler Welch, for £98m. For me, the even greater reliance on travel is not a good development. In the financial year ending 31 March 2019, Fowler Welch made revenues of £178.9m and a pre-tax profit of £4.3m.
UPDATE: Estate agents have been able to open back up for business since this article was first published. It’s still recommended however that viewings are done virtually when possible.