2 UK shares I’d avoid in 2022

As the pandemic slowly winds down, there are plenty of UK shares set to recover but that could also be investment traps. Zaven Boyrazian explores.

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As we enter 2022, many UK shares that have been decimated by the pandemic are slowly getting back on their feet. But not every recovery story could have a happy ending. With that in mind, I’ve spotted two once-prominent FTSE 250 companies that I think will struggle to return to their former glory in 2022. Let’s explore.

Is this UK share a ticking-time-bomb?

There seems to be a lot of hope being held out for Cineworld (LSE:CINE). The UK cinema chain saw its shares collapse in 2020 after the pandemic forced everyone to stay at home. But since then, the situation has improved. Cinemas have reopened. And with a lot of pent-up demand from consumers, along with a long line-up of delayed blockbusters, the resurrection of its revenue stream seems to be progressing well.

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That certainly sounds like an exciting recovery story on the surface. But after exploring deeper, I remain sceptical about the long-term prospects of this business. Primarily because of its debt.

Cineworld’s pile of loan obligations has always been substantial, thanks to its acquisitive growth strategy over the years. Unfortunately, this may have sealed the group’s fate. Without any meaningful cash flow to cover interest expenses at the height of the pandemic, management was forced to take out new loans while renegotiating covenants on existing ones.

Consequently, it now has around $8.8bn (£6.4bn) of debt to repay. And with interest rates on the rise, along with a massive $970m (£705m) legal bill to cover after pulling out of the Cineplex acquisition in 2020, even if the company can return to pre-pandemic sales levels, it likely won’t be sufficient to cover its obligations to creditors.

With the covenants and waivers renegotiation lever already pulled, I think a financial restructuring could be on the cards. This means lenders would agree to write off a chunk of debt in exchange for new equity. But historically, when this happens, existing shareholders can be left with close to worthless shares. As such, the potential gains from a recovery doesn’t match the risk in my mind. That’s why I’m steering clear of this UK share.

The travel sector limps on

Carnival (LSE:CCL) is another company thrashed by Covid-19. This cruise line suspended most of its operations in the early days of the pandemic to protect its customers. The travel restrictions that followed for months after only increased the pressure, and management also relied on debt financing to stay afloat.

Skip forward to today, and the group has over $33.2bn (£24.2bn) of debt on its balance sheet. Just like Cineworld, rising interest rates could be disastrous for profit margins. That’s obviously bad news for the shares of this UK stock. But the situation may not be as bleak as it seems.

Unlike Cineworld, Carnival has amassed over $9.1bn (£6.6bn) in cash that can easily cover its short-term obligations. Meanwhile, assuming that new travel restrictions are not introduced in 2022, management expects its entire fleet of cruise ships to return to operations by June.

I must admit this is an encouraging sign. However, I think there are far better and less leveraged investment opportunities for my portfolio. Therefore, I won’t be buying these UK shares today either.

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Zaven Boyrazian 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.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

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