AIM stocks to own in the second lockdown

by Andrew Hore from interactive investor |

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Healthcare, construction, property, music and DIY companies stand to benefit from enforced isolation. Our AIM writer lays out which ones.

As England goes back into lockdown there will be many businesses that are enormously affected by the move to try to decelerate the Covid-19 infection rate. 

Pubs and restaurants will be severely affected, for example, but there are some AIM companies that should be able to weather the disruption or even benefit from it. 

Healthcare and gold miners will continue to prosper, although there are other less immediately obvious sectors where individual companies can prosper even in difficult times. 

The latest lockdown is not as significant as the first one. For one thing, it is not as widespread as the initial one was. There are industries and sectors that are not shutting down, or where more they will be able to continue with more of their business.

Companies have already adapted their working practices to the Covid-19 conditions. This means that for many companies the changes will be minimal this time. Some businesses will be already operating in one of the higher lockdown tiers that have been used in parts of the country. Remote working has become natural for many people. 

Currently, the lockdown is due to last from 5 November to 2 December. There is a good chance that this lockdown could be extended, but I suspect the government would ideally like to end the lockdown before Christmas. The first lockdown lasted for around ten weeks for non-essential retail and around 15 weeks for leisure activities. These are again the main areas that will be affected. 

Schools and colleges will remain open for the coming month and this means that most parents will not have to look after their children during the day. Construction and manufacturing will also continue. 

The furlough scheme is continuing until next March. It will pay 80% of an employee’s salary up to £2,500 per month. This applies to all the UK. However, the £1,000 job retention bonus that was going to be paid in February where a furloughed employee had recommenced work has been scrapped. 

Even so, it is going to be a tough time for pubs and restaurants, non-food retailers without a significant online presence, transport and travel-related companies.

Peel Hunt estimates that economic output may be 7%-to-10% lower than it would have been in the lockdown period. 

Construction is continuing during the current lockdown. That will be good news for construction materials suppliers, such as Breedon Group (LSE:BREE) and SigmaRoc (LSE:SRC). Activity levels have been improving since May, following a return to housebuilding and other construction activities.

Construction materials sector consolidator SigmaRoc has a good track record of canny deals, and recent trading has been better than expected during the spring. Interim revenues were £54.5 million and pro forma revenues were in line with the corresponding period in 2019, despite the lockdown. 

The unrelated Sigma Capital (LSE:SGM) was hit by construction delays earlier this year. Sigma makes its money from selling private rental housing developments to investors – predominantly the fully listed PRS REIT (LSE:PRSR) – and recurring management fees on private rental developments. 

Sigma negotiates fixed cost contracts with housebuilders so it will not be hit by any additional charges relating to changing work practices on sites. Sigma has changed its year end from December to September, so it has started a new financial year. 

Private rental housing has generally had the better rent collection rates than most types of property. There is strong demand for rental housing, and that means that there is also investment demand from institutions and real estate investment trusts. Sigma is entering the private rental market in London in partnership with asset manager EQT.

Urban Logistics REIT (LSE:SHED) is likely to benefit from continued demand for logistics premises that are close to the point of delivery.

 It has been collecting 100% of rents owed and has already collected 99% of rents for the current quarter. Urban Logistics recently raised £92.3 million at 139p a share and the yield is more than 5%. 

Estate agents are staying open this lockdown, and they are already benefiting from the stamp duty holiday on house sales. The sector has been booming, although there have been indications of longer times between sales being agreed and exchanged. That means that the number of deals falling through has been higher than in the past. 

Letting activities held up during the previous lockdown, and firms such as Belvoir (LSE:BLV) and The Property Franchise Group (LSE:TPFG) will do even better with their estate agency operations continuing to trade. 

Belvoir has a particularly strong and profitable financial services business which will further boost its performance. 

Underlying interim pre-tax profit improved by 7% to £3.16 million, helped by the acquisition of the Lovelle chain. 

Earlier this year it was thought that 2020 pre-tax profit could be less than 50% of the 2019 figure of £6.2 million. Belvoir should still be able to achieve the £6.7 million 2020 pre-tax profit forecast in September. The dividend has been reinstated.

High street retailers will be struck by the lockdown, and it would hit hard if it is extended towards Christmas. Pure online retailers ASOS (LSE:ASC) and Boohoo (LSE:BOO) should do much better, and there could be longer-term benefits if they recruit and retain additional customers that would normally have shopped in the high street.

Naked Wines (LSE:WINE) is purely an online business having sold the Majestic Wine retail outlets. In this case its subscription model means that new clients are likely to be retained rather than just be one-off purchasers. 

The lack of opportunities to go to pubs and events means that there will be much greater demand for wine over the Christmas and New Year period, even if the lockdown is eased or ended. Naked Wines is one of the few companies that could do well enough to spark a profit forecast upgrade.

Musical instruments retailer Gear4music (LSE:G4M) is another online focused business. It did well during the original lockdown. Combined with a focus on products with better margins this enabled its performance to improve this year.

Companies with strong recurring revenues will continue to do well. Smart Metering Systems (LSE:SMS) has cash generative long-term recurring revenues. 

The index-linked annual recurring revenues are running at £76.6 million. There is an order book for two million smart meters, and that could add £40 million to index-linked annual recurring revenues. 

SMS was not allowed to install smart meters during the initial lockdown, which meant that installation revenues fell 8% in the first half, but more importantly this delayed growth in long-term recurring revenues. 

This time SMS can continue installations, so long-term recurring revenues will continue to build up. A figure of £85.5 million is forecast for 2021, so SMS should continue to be on course for this. 

Full year pre-tax profit of £14.1 million is forecast. The balance sheet is strong thanks to the disposal of smart meter assets earlier in the year, although capital investment in meters will move the company back into a net debt position next year. 

A full year dividend of 25p a share is expected, with plans to grow that dividend by 10% a year until 2024.  

DIY and home improvement is an area that has prospered this year as people save money on travel and entertainment and seek other ways to spend it. 

Carpets and tiles manufacturer Victoria (LSE:VCP), which has an international spread of activities, has already reassured investors that trading will be in line with current expectations this year. 

Since the end of the first lockdown trading has been stronger than pre-Covid budget expectations. Second quarter (third quarter calendar revenues) revenues were 109% of budget. A cash injection provided firepower for earnings-enhancing acquisitions. 

Self-storage sites operator Lok’nStore (LSE: LOK) has been prospering this year, and it has additional space going live in the next few years. Demand remains strong, with some of the home improvement and clearance activities probably having a knock-on effect and helping to increase occupancy rates and take up of new space. 

The stores are staying open and the company has already changed its way of working, including additional opening hours to ensure visits are spread out. 

The easing of the first lockdown led to better than expected trading since May, and the figures for the year to July 2020 were slightly better than pre-Covid-19 expectations and forecasts were upgraded.  

Management plans to continue to increase the annual dividend by 1p a share each year. The shares are trading at just above the net asset value (NAV) of 566p a share, and at a small discount to forecast NAV of 586p a share. 

Andrew Hore is a freelance contributor and not a direct employee of interactive investor.

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