The end of April has not been overly pretty for the FTSE 100. Indeed, recent news of further lockdowns in China has led to fears around the global economy. Further, global inflation rates have continued to rise, leading to concerns about rapid interest rate rises in the US. Finally, the tragic war in Eastern Europe has continued, and unfortunately, a ceasefire does not seem close. These events have had many direct and indirect impacts for UK-listed companies, and over the past five days, the FTSE 100 has sunk over 2%. But I feel this has created some opportunities to buy UK shares. Here are two I think are now too cheap.
A luxury fashion brand
Burberry (LSE: BRBY) has been significantly impacted by rising coronavirus cases in China. This is due to the strong presence the luxury fashion house has in Asia, where it recorded nearly half of its profits in the first half of the current financial year. Therefore, the recent surge of cases in Asia, and the lockdown in Shanghai, is likely to see reduced demand and sales. These lockdowns have already had major impacts on other luxury fashion houses. For example, in the Q1 trading update by Kering (owner of Gucci and Saint Laurent), the CFO stated that the recent lockdowns were tougher than last summer’s disruptions and noted impacts on consumer sentiment. Similar problems are likely to exist for Burberry.
However, I take a long-term viewpoint, meaning that now may be a good time to buy. For example, Burberry is not entirely reliant on Asia, with its highest growth this year coming from the US and Europe. Further, I feel that the current Covid situation in China is short term, especially as governments are now more experienced in dealing with the situation.
In addition, its recent results impressed me. For instance, in the half-year report, Burberry managed operating profits of £207m, up from £88m the year before. Free cash flow also reached £104m, allowing an interim dividend of 11.6p and a share buyback programme of £150m. This shows significant confidence at the group. As such, after falling over 25% in the past 12 months, while also showing great promise for the future, Burberry is a UK share I’d happily add to my portfolio in May.
A far smaller UK share
National Express (LSE: NEX) is around a quarter of the market cap of Burberry, yet it’s another UK share I’m very keen on, especially after it’s fallen nearly 25% in the past year. I feel that this drop has been very unfair.
Firstly, NEX has fallen due to the rising price of oil. However, it has hedged oil fully throughout 2022, and 69% for 2023, which should mitigate its impact. It may also help boost demand, as consumers look for cheaper ways to travel.
In addition, the group managed to return to some profitability last year, reporting underlying profit before tax of nearly £40m, compared to a £106m loss the year before. Free cash flow of over £123m means that I’m confident the dividend is close to returning. In addition, Q1 group revenue was back to 2019 levels, exceeding these levels in March.
Therefore, although I worry slightly about wage inflation, and the effect this may have on profit margins, I believe National Express is a great recovery stock. Therefore, I may buy more of this UK share in May.
