23rd Nov 2022 12:21
(Alliance News) - Leisure stocks have underperformed wider London equity markets, but analysts at Liberum believe they are near "inflection point" as peak recession and inflation should already be baked into valuations.
Leisure stocks have underperformed wider markets in London by 56% since spring 2021, according to Liberum's analysis Investors have fretted over inflation and economic slowdown fears, made worse this year by Russia's invasion of Ukraine.
"More recently however, the sector appears to have found a floor with shares up 3.9% over the last month," Liberum added.
"The probability of a prolonged recession has, in our view, been substantially priced in and, with peak inflation and peak interest rates now on the horizon, we believe we are approaching a valuation inflection point and expect a re-rating in 2023."
Liberum set out its top picks in the sector. They include pub firms City Pub Group PLC and Young & Co's Brewery PLC, and bars and restaurants operator Loungers PLC and Mexican dining chain Tortilla Mexican Grill PLC.
The investment bank also likes hotel company Whitbread PLC, concessions operator SSP Group PLC, ten-pin bowling operator Ten Entertainment Group PLC and low-cost gym operator Gym Group PLC.
City Pub shares have fallen 32% over the past year, while Young's has lost 20%. Loungers has given back 30% while Tortilla has lost a whopping 54% of its value of the past 12 months. Gym Group has fared among the worst, shedding 64%, though SSP and Whitbread have lost 17% and 14%, respectively. Ten Entertainment has defied the malaise, however, rising 0.9% over the past year.
"The sector is generally cheap, but our top picks provide the best balance of quality, near-term resilience and long-term potential," Liberum said.
The investment bank said Ten, Whitbread and Loungers are among those to have the lowest inflation risk going forward. It gave the opposite verdict for pub firms, judging JD Wetherspoon PLC to carry one of the largest inflation risks in the leisure sector.
On industry trends, Liberum has noticed that pubs have seen a "steady" recovery post-Covid, though an early boost driven by pent-up demand did not materialise. Gyms are similarly seeing a slow recovery, the low-cost operators, such as Gym Group, are eating up market share.
"Competitive socialising" has enjoyed a boom, however, lifting ten-pin bowling operators.
"We maintain our view that the two market-leading bowling operators should continue to deliver above average revenue growth, with the structural shift towards low-cost family entertainment thriving in an inflationary environment where value becomes even more prominent," Liberum said, referring to Ten Entertainment and peer Hollywood Bowl Group PLC.
Hotels, meanwhile, enjoyed a "swift" post-Covid bounce.
Liberum added: "This bounce back has initially been driven by pent up demand for holidays, helped by the return of events and by the resumption of business travel. It has also been supported by a reduction in supply with Whitbread estimating that there has been a 10% decline in independent room supply over the last two years and a 4% decline in total UK hotel supply."
By Eric Cunha; [email protected]
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Related Shares:
CPC.LLoungers PlcGym GrpTortilla MexicSSP GroupWhitbreadYoung & Co's BreweryWetherspoon (J.D)Hollywood Bwl