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Are these locked-down UK shares too cheap to ignore?

Roland Head
·4-min read
The UK national flag in front of Canary Wharf skyscrapers where professionals trade shares for a living.
The UK national flag in front of Canary Wharf skyscrapers where professionals trade shares for a living.

Times are tough for companies that depend on people eating and drinking while they’re out and about. The two UK shares I’m looking at today represent businesses I’ve admired for years. Yet both companies have lost more than 40% of their value so far this year. Given this, I’ve been taking a closer look to find out if these shares are now too cheap to ignore.

Sales could bounce back in 2021

Pub stocks have been among the worst performing UK shares this year. Today’s full-year results from pub chain JD Wetherspoon (LSE: JDW) show us the extent of the damage.

Known to its customers as Wetherspoons, its sales fell by 30% to £1,262m last year, pushing the group to a pre-tax loss of £34.1m. Impressively, this is the company’s first loss since 1984.

The company says that since reopening, like-for-like sales have been 15% below the same period last year. Sales were said to be stronger during the first few weeks, but have slowed since the 10pm curfew and rule of six came into force.

Today’s results also include more clues about how difficult this year has been for pub operators. The interest costs on Wetherspoons’ debt were only covered 0.3 times by its underlying operating profit, down from 3.9 times in 2019. This implies that the company isn’t making enough money even to service its debts — a worrying situation.

At the same time, the group’s borrowings have risen. Year-end net debt was £817m, up from £737m last year. To provide short-term funding and reduce the risk of debt-related problems, Wetherspoons raised £141m in a share placing in April.

Is it a buy? Wetherspoons is expected to return to profitability next year. The latest analysts’ forecasts suggest the group could generate earnings of about 27p, pricing the stock at around 36 times forecast earnings. To put this in context, earnings in 2019 were 75.5p per share.

If pub operators can return to normal by next summer, then I think Wetherspoons could be cheap at current levels. But with the risk of a second lockdown on the horizon, this is far from certain. I’d rate JDW shares as a speculative buy, at best.

This UK share has doubled in six years

Like Wetherspoons, sausage roll maker Greggs (LSE: GRG) was seen as one of the best operators in the food sector before the pandemic.

Between 2010 and 2019 Greggs’ pre-tax profit rose by 118%, from £52.4m to £114.2m. But the firm is expected to report a full-year loss of nearly £50m this year, while profits in 2021 are expected to be around half 2019 levels.

One problem is that Greggs’ business depends on people being visiting shops, offices and travel locations. We just don’t know how long it will be until this kind of activity returns to historic levels.

Management says that since shops reopened, sales have running at around 75% of the level seen during the same period last year. That’s better than I expected, but lower sales will hit profits hard.

What I’d do with Greggs shares: Even after this year’s share price crash, Greggs’ share price is still double the level seen in November 2014. Are they really cheap? I’m not convinced.

At a last-seen share price of 1,300p, Greggs shares trade on 14 times 2019 earnings and a chunky 28 times 2021 forecast earnings. I think that’s high enough, for now. Much as I admire this business, I’d rate this UK share as a hold.

The post Are these locked-down UK shares too cheap to ignore? appeared first on The Motley Fool UK.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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