It is 12 months since equity markets hit their Covid-19 lows. Few at the time would have predicted the scale of the subsequent market rally, or the speed with which the market’s focus has shifted from concern over companies surviving the pandemic to optimism about those positioned to benefit as economies emerge from lockdown.
We believe that this shift in sentiment has led many more cyclical, industrial, and consumer stocks to trade at generous multiples of fully recovered profits as a rebound becomes priced in. However, there remain compelling but less obvious opportunities that should benefit from a “normalisation” post-lockdown. We have been looking for companies where, on top of a near-term recovery, we may see the virus benefit their end markets and where management can improve their businesses. Here are three examples.
The changing healthcare market
Spire Healthcare (LSE: SPI) is a leading private-hospital operator in the UK. Private hospitals have had their capacity reserved during the pandemic, at cost, to support the NHS. Now activities are returning to normal and the healthcare landscape has fundamentally changed. Backlogs of both private and NHS procedures will take years to clear, with private-sector support needed to achieve this. Spire is well placed to benefit.
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The pandemic has also shifted patients’ willingness to engage with healthcare services digitally. Spire rolled out online tools in the crisis to enable digital pre-assessment. Customers enjoy improved convenience while Spire benefits from efficiency gains. We believe further such self-help opportunities exist. Spire shares have had a good run, but continue to trade below a freehold property-backed book value. At around nine times earnings before interest, taxes, depreciation and amortisation (Ebitda) they still offer great medium-term value.
Digitising data services
Wilmington (LSE: WIL) is a provider of data, training, and events to a variety of markets. Despite benefiting from significant recurring revenues, the portion of the business reliant on in-person events and training has inevitably been hit by Covid-19. Wilmington should now see these services bounce back, but more excitingly it has used the pandemic to accelerate its shift to enhanced digital delivery of its services.
Digitising its content allowed Wilmington to keep offering services to its customers through the pandemic, gaining share from competitors. This digital-ready content can now more easily be packaged into new products, served to new customers and accelerate growth. The shares are still 20% below their pre-pandemic level, despite the firm’s improved prospects.
A hidden recovery
Clinigen (LSE: CLIN) provides hard-to-access medicines to healthcare professionals and clinical trials globally. Demand for its services dipped as hospital treatment and clinical trials slowed in lockdown. This demand is set to recover. Clinigen can also benefit from an increased focus on drug distribution as vaccines roll out; new product launches; and cost synergies from recent acquisitions.
Despite the recovery potential, the shares trade on a forward price/earnings (p/e) ratio of ten. While gearing is high, the company has strong underlying cashflow. As leverage falls the shares are likely to trade nearer the long-term average p/e of 15.
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