Pubcos have slashed cash burn through a mixture of cash conservation measures and government support, the analysts noted.
“We sense that the prevailing expectation is for re-opening in July, but with gradual relaxation of social distancing requirements and a slow recovery.”
While leverage levels across the sector looked high entering this crisis, capital structures were supported by asset backing and defensive cash flows.
With the companies now burning cash for an uncertain period and potential valuations and buyer demand for pub freehold assets understandably likely to be less favourable than before the Covid-19 pandemic.
“Liquidity is tight, although, generally-speaking, we believe UK pubs can endure a mid-duration shutdown that has some visibility on conclusion/path to recovery,” the analysts said.
“A key additional question is how prolonged and diminished is the period of weak trading following the lifting of the shutdown order.”
The JPMorgan number crunchers are confident that bank covenant waivers and/or additional liquidity financing will be available to all pubs in their coverage, with equity raises, as completed by JD Wetherspoon PLC (LON:JDW) this week, “a last resort, given depressed valuations”.
Shares in M&B, having lost more than two thirds of their value since the start of the year, were upgraded to ‘overweight’ as the analysts said the group has good levels of liquidity and sustainable leverage and so therefore sees favourable risk/reward.
Despite the share price target being slashed to 340p from 490p, this would still offer potential upside to the previous close price of 171.2p.
In their view, Young & Co’s Brewery PLC (LON:YNGA) has the strongest balance sheet with less initial leverage and more liquidity headroom, though the bank’s rating remained at ‘neutral’ as its share price already reflects its solidity.