Simon Young, manager of the AXA Framlington UK Equity Income fund, discusses the companies that have thrived following the coronavirus crisis
While lockdowns were catastrophic for consumer-facing businesses around the world, the easing of restrictions and reopening of economies has allowed many companies to look to the future with restored confidence. According to Simon Young, portfolio manager at AXA Investment Managers, some businesses have managed to improve their competitive positions through the pandemic, having acted swiftly to cement their advantages over rivals.
“In much the same way that Winston Churchill advised not to let a crisis go to waste, some companies have taken advantage of disarray amongst peers to increase their competitive positions,” he says.
“We have taken the opportunity to establish holdings in great businesses that have been hit hard by the pandemic but which we think will emerge fitter and even more competitive.”
Below, Young outlines the stocks he believes will come out of the pandemic in better shape than they entered it, having retained their barriers to entry.
“Just prior to the pandemic, Greggs announced a partnership with Just Eat to provide nationwide delivery from its shops. The start of the UK national lockdown in March 2020 persuaded management of the need to fast-track the rollout and customer take-up has been enthusiastic, with delivered goods now accounting for nearly 10% of Group sales.
“Greggs also restarted its store opening programme at a time when many competitors remained in cash conversation mode and is taking leases for new shops in areas that were previously unaffordable due to rent cuts on the high street. Profits are recovering fast and encouragingly the dividend was recommenced with the interim results. A lesson learned from the Global Financial Crisis: it is best to press home your advantage when your competitors are least able to respond.”
“Compass Group, the leading international foodservice company, saw sales fall around a third in 2020, but similar to the period following the Global Financial Crisis in 2008/9 it is seeing a ‘flight to trust’, with an upturn in clients wanting to outsource their catering operations for the first time. One advantage listed companies have over private companies is often access to deep pools of incremental capital at short notice. Compass tapped investors for £2bn in May 2020 to facilitate new business growth at a time when many privately owned competitors were struggling. The funds are being put to good use, with Compass investing in digital pre-order apps to get greater insight into daily demand, increasing the flexibility of its workforce and implementing more central production hubs to improve training and reduce food waste.
“Given the considerations of hygiene and reputation are so prevalent for potential customers, the equity raise has put Compass on a strong footing to win new business from smaller ‘mom & pop’ competitors. The company has noted that 50% of new business wins in the recent quarter came from first-time outsourcers and year to date the retention rate remained strong at 95.4%. Moreover, its operations benefit from its international scale and specialisation, enabling it to win contracts and deliver economies of scale.”
“Most motor insurers may not strike investors as fleet of foot, but Admiral proved to be very agile during the crisis. Admiral was the first major insurer to understand that pandemic-induced lockdowns would reduce miles driven and by extension, the number of accidents, thus boosting profitability during the crisis. Admiral pressed home its competitive advantage by offering pandemic rebates to existing customers, cutting prices for new customers and providing more digital and self-service options. Group customers have grown 14% to over 8 million since the start of the pandemic and have risen nearly 70% in the last five years.
“Agility has been part of Admiral’s DNA since it was a start-up in 1993 and was looking to undercut expensive brokers by offering a direct-to-consumer motor insurance over the telephone. The company soon realised the low cost distribution benefits of the internet, even starting its own price comparison site, confused.com, and was the first to introduce multi-car policies. Today Admiral has diversified into household and travel insurance and has operations in France, Italy, Spain and the United States. I admire the way the new CEO Milena Mondini de Focatiis is maintaining Admiral’s challenger mindset with a newly created Pioneer division which aims to introduce new products after a truncated ‘test and learn’ approach.”