Many UK shares are currently trading at discount prices. It’s highly likely a number of them will be among the most rewarding purchases long-term investors will ever make. However, I’d caution against buying big fallers indiscriminately. Some will be wealth destroyers.
The three UK shares I’m looking at today appear temptingly cheap. It’s easy to be dazzled by their discount prices. However, I don’t believe they’re bargains. Indeed, here’s why they’re firmly on my ‘sell’ list.
The 3 UK shares I’d sell
Owner of cinema chains Cineworld (LSE: CINE), shopping malls owner Intu Properties (LSE: INTU), and fashion house Ted Baker (LSE: TED) are all trading at big discounts to their pre-market-crash levels.
At 66p, Cineworld’s shares are down 64% since 21 February. Those of Intu, at 5.3p, are down 61%, while Ted’s, at 153p, are 51% lower.
However, all three stocks had already fallen far below their 52-week highs before the coronavirus crash even got started. On 21 February, Cineworld was 43% below its high of spring 2019. Intu and Ted were down 86% and 85% respectively.
As such, these are UK shares whose troubles pre-date the pandemic. Covid-19 has only exacerbated their falls.
I was dubious about Cineworld’s strategy of massive expansion into North America. For one thing, movie-going in the territory has been in structural decline since 2002. For another, the company’s debt ballooned to what I considered uncomfortable levels.
Subsequently, concerns about the wide decline of young audiences, and questions about Cineworld’s accounting, true level of debt and gearing, only added to my unease. These are the issues that make me bearish on the stock.
Of course, the acute crisis of shuttered cinemas doesn’t help the cause of a now-sub-£1bn-cap company that showed net debt of $7.7bn on its year-end balance sheet, and current assets of $0.45bn versus current liabilities of $1.49bn.
Intu the abyss
Intu’s debt of £4.5bn absolutely dwarfs its market-cap of £72m. Earlier this year, it was exploring a possible equity raise of between £1bn and £1.5bn. However, it was overtaken by events in the wider world, and had to pull the plug on the idea.
Intu was already struggling with the structural challenges facing bricks-and-mortar retailing in the face of the relentless rise of online shopping. However, debt has become an even bigger burden now. The company received just 29% of its second-quarter rents (versus 77% for the same period last year).
I can only see a toss-up between Intu’s shares being worth zero pence, or a nominal 1p or so, in a massive debt-for-equity restructuring. Neither outcome would be good for anyone buying the shares at today’s 5.3p.
UK shares I’d sell #3
According to several industry analysts, the Ted Baker brand was misfiring well before founder and chief executive Ray Kelvin agreed to resign last spring, while denying allegations of “forced hugs” and harassment.
Further boardroom departures, the identification of a £58m overstatement of the value of inventory, and profit warnings, have heaped trouble upon trouble for what is now a £68m-cap company.
Ted’s done a sale-and-leaseback of its head office (raising £72m net), and also bagged a £13.5m increase in borrowing facilities. However, I find it astonishing it hasn’t updated the market on its net debt position, since telling us (in its interim results on 3 October) that it had net borrowings of £141m at 10 August.
G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Ted Baker. 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.