Ocado, London Stock Exchange and Reckitt Benckiser are the top picks among UK blue chips to buy for a post-coronavirus return to normality in the later part of the year, according to analysts at Berenberg.
Charging its various analysts to cast their eyes over 600 big-cap European stocks with new “realistic” estimates, the German bank selected 18 names across the continent, including the three London-listed PLCs.
It was a ‘bottom up’ process, meaning the companies’ fundamental pros and cons were used as the determining factor, which produced “lots of debate” among Berenberg’s stock pickers.
The overarching assumptions were made for all the companies of a “severe impact” in March that will continue for the whole of the second quarter before “early signs of recovery” from the middle of the third quarter onwards and a continuation of the return towards more normal business conditions in the final quarter of 2020.
Then 2021 will see the dawn of the “new normal”, with some remaining spill-over from 2020, and a high probability of continued economic weakness.
Given that there remains significant uncertainty about how long the crisis will last, the analysts said they have biased the list towards companies “that are better placed if the crisis persists beyond our base case”.
Benefits from the outbreak
Top of the list were companies that “could see a positive financial impact from the crisis”, a list that includes Ocado Group PLC (LON:OCDO), Reckitt Beckiser Group PLC (LON:RB.) and France-listed video games designer Ubisoft.
The surge in demand for groceries due to customer stockpiling is a small positive for Ocado’s financials as the UK retail joint venture is only about a tenth of the value of the group, with a “bigger impact” longer-term for the Ocado Solutions tech business.
“This represents the vast bulk of group valuation and will benefit from a realisation among grocers that automated fulfilment solutions are far superior to manual picking methods. The current crisis has shown us a snapshot of the future of online delivery.”
Over at RB, which was at the start of a major turnaround effort under new management team when the virus broke, there is expected to be a benefit to financials from the coronavirus crisis, though for many products the consumer stockpiling effect will only be temporary.
But the analysts say RB’s 30% revenue exposure to over-the-counter medicines like cough remedies, vitamins, painkillers as well as disinfectants, means COVID-19 is “likely to result in a sustained consumer focus on hygiene and health”.
Broadly immune from virus
London Stock Exchange Group PLC (LON:LSE) is expected to be one of the companies whose financials remain broadly unaffected by the corona-crisis, with others in the list being German renewables-rich utility RWE and Dutch-headquartered cloud computing specialist Wolters Kluwer.
Covid-19 is seen by Berenberg as only likely to have only a minor impact on LSE’s financials as the business is not especially disrupted by lockdowns, though the situation could delay completion of the Refinitiv acquisition though the agreed bank funding for this deal becomes cheaper following the cuts to US interest rates.
Although leverage is high, the analysts expect debt to get back into the more normal range within three years of the deal closing, while on pro forma forecasts the combined business trades on a digit discount to global exchange peers despite Berenberg’s forecast for “materially higher growth”.
Laggards and nearly-rans
The bank’s stock pickers also expect some companies to have a bigger impact in 2020 but lessening in 2021, including Irish dairy group Kerry, drinks group Pernod Ricard and chemicals company Linde.
There were also some nearly-rans among UK names, including Barclays (LON:BARC), which is seen as “cheap, but with concerns about political and regulatory pressures”; Royal Dutch Shell (LON:RDSA, LON:RDSB) and Polymetal (LON:POLY) as preferred oil & gas and mining plays; while value is seen in Associated British Foods (LON:ABF) and Compass (LON:CPG) but with an acknowledgement that there are “high sensitivities” on the length of the crisis.