The coronavirus will have a long-lasting impact on the economic landscape and alter the competitive positions across numerous industries. There will be a benefit for the strongest companies which will emerge stronger and with superior growth opportunities.

Larger companies tend to be the ones that are the most liquid and they can readily tap the equity markets for funding. This means they are more likely to survive and thrive as they find opportunities to take market share from defunct competitors, acquire struggling smaller rivals and snap up distressed assets at discount prices due to liquidity crunches.

BIGGER IS BETTER

Size is a strength in these uncertain times and investors are placing a premium on the value of ‘survivability’ in companies, which favours the corporate behemoths and large cap lions with bigger market shares, stronger balance sheets and greater access to the liquidity needed to see them through the crisis.

Tesco (TSCO) is currently reaping the benefits of having large capacity to deliver food to homes across the UK. It is likely to be picking up new shoppers during the lockdown who could become loyal customers post-crisis, thus helping Tesco to increase its market share.

The sharp rise in people wanting to order groceries online also plays to Ocado’s (OCDO) strengths as a provider of systems to help run warehouses and fulfil online food orders. Food retailers will now be thinking more seriously about the online channel and Ocado’s services to third parties could feasibly be in much greater demand in the coming years.

PREYING ON THE WEAK

Whereas most of the UK-listed companies that have recently tapped investors for more have done so to survive the crisis, some of the strongest players regard this as the perfect time to prey on weaker rivals, thereby extending their market position.

Car-selling portal Auto Trader (AUTO) also made similar move, raising £186m. Broker Peel Hunt says: ‘Auto Trader is one of a series of very strong digital platforms that operate in the UK. What distinguishes it, we believe, is the balance of market leadership and value added to the industry served.

‘The recent fundraising should have extinguished debt, allowing the company to assist the customer base during the period of crisis and to arm the company for mergers and acquisitions should the opportunity occur.’

Peel Hunt also suggests IT reseller Softcat (SCT) could come out of the crisis in a much stronger position. It comments: ‘With a well-diversified revenue split, including over a third coming from government IT spend and a large portion aligned to work-from-home tech vendors such as Microsoft and Cisco, structurally Softcat is better placed than most to navigate the potential headwinds to UK tech spending. This will see it being gifted a larger market share as recovery kicks in.’

There should be greater demand for Rentokil Initial’s (RTO) essential pest control and hygiene services following the pandemic. Building materials group Marshalls (MSLH) also looks like it will come out the other side in a much stronger position than its smaller rivals. Peel Hunt says other hard landscaping businesses have struggled to keep pace with Marshalls’ product and service development in the last five to 10 years and the crisis is likely to make it even tougher for them, allowing it to gain more market share.

PRIMARK’S PROSPECTS

The shakeout in the already hard-pressed retail sector is likely to be brutal, only accelerated by online shift triggered by deep lockdown. For the survivors, the withdrawal of capacity may also be an opportunity to rebound with more pace than the market expects.

Discount fashion chain Primark could be seen as at a disadvantage post-coronavirus, given its lack of an online business and the new social distancing rules which will hit brick and mortar store footfall.

The encouraging news is that Primark has begun to reopen European stores and according to finance director John Bason – as told to the Financial Times – early trading in these outlets has been spread more evenly through the week so far, with basket sizes notably higher than was previously the case.

So in spite of the uncertainties ahead, Shore Capital sees Primark, owned by Associated British Foods (ABF), as ‘an undoubted fixture of apparel retailing in the future when casualties sadly abound around the world’.

Its value credentials could also stand it in good stead if the world goes through a long period of economic gloom.

WEIGHING UP DFS

Numis says that over three times the size of its nearest competitor, with a well invested store estate, advanced online proposition and a recently-strengthened balance sheet, DFS Furniture (DFS) is well positioned to emerge stronger from the current crisis.

DFS, which has this year suspended the dividend and raised £64m through a share placing, ‘steadily outperforms the market through good times, but, perhaps counterintuitively, it is through bad times where scale matters most’ according to Numis. ‘A superior proposition and industry leading margins allow the business to weather the cyclical upholstery market.’

Although the upholstery market is unlikely to be immune from a disrupted and depressed housing market, the fact people are spending more time at home means there is a chance that buying a new sofa will feature on consumers’ shopping lists.

‹ Previous2020-06-04Next ›