Much has been said and written in recent weeks about the rapid spread of the coronavirus (COVID-19), with some debating that this year the global economy will most likely experience the worst recession since the Great Depression, surpassing that witnessed during the global financial crisis a decade ago.

The pandemic has presented several challenges globally, with the confinement of millions of people to their home eventually leading to the complete shutdown of several industries, case in point the hotel and catering industries.  But is it all doom and gloom for investors or should they be on the lookout for potential investment opportunities, and capitalise from the current wave of volatility that they are currently faced with? 

The absence of household necessities from store shelves notwithstanding, whether we are working remotely, quarantined at home, or out of school weeks early for the semester, the fact of the matter is that people still need to buy groceries, consumer staples, food, cleaners, and other household essentials.

The truth is that even in the darkest of times, consumers still need to make necessity purchases. Although more than 16 million people filed for unemployment benefits in the US, over the past three weeks, large e-commerce and supermarket companies were leading the call for new staff, to cope with the increased demand for basic goods during such environment.

These companies have been overwhelmed by a wave of panic-buying as shoppers rushed to stock up amid the coronavirus pandemic. In view of the above, the e-commerce giant Amazon is currently adjusting to the unprecedented surge in demand. The company recently announced its desire to hire an additional 75,000 workers at its facilities, in addition to the 100,000 jobs it has previously created to combat the increase in demand brought about by the pandemic.

The COVID-19 outbreak has fuelled other large companies to recruit new staff in order to cope with the increased demand for basic goods as coronavirus demand intensifies. Large supermarket chains across the globe, including Tesco, Asda, Aldi and Lidl, have all gone on recent hiring sprees as demand surges as a result of the coronavirus crisis. This solidifies our view that the products offered by these companies usually have stable, if not growing demand, regardless of any economic conditions.

Companies with such unique and defensive business models have the ability to maintain a healthy and stable level of revenue, cash flow and profit even during such extraordinary times. This argument is also valid in the local context. 

PG plc (PG) which is predominantly engaged in the retailing of food, household goods and other ancillary products through the Pavi Shopping Complex and Pama Shopping Village, recently announced that in the short term, the Group’s supermarket business segment is expected to benefit from the increased consumption and stocking up brought about by the COVID-19 outbreak.

Given that PG operates in multiple lines of business within the retail segment, including the Zara franchise operation, the shares were not spared in local equity sell-off witnessed post COVID-19 outbreak in Malta, with the price dropping to a low of €1.60 over the past couple of weeks. 

However, an investor must keep in mind that the retail business is skewed towards the supermarket chain which is doing well in this environment.

With respect to the retail mall operation and the Zara franchise, the Group is expected to have a negative impact given that this was classified as a non-essential service. It is crucial to point out that, as per H1 2020 results, the Group’s franchise’s business only accounts for circa 18 per cent of PG’s total revenue, therefore the Group is still expected to retain its strong cash position.

Although the pandemics impact on PG’s financial performance is still unknown at this stage, we expect that the essential nature of the Group’s supermarket business, coupled with the low gearing level maintained by PG, to act as a powerful means in order to contain the overall COVID-19 impact. This will potentially enable the Group to mitigate the challenges that the pandemic will present.

Investors should also keep in mind that the PG Group is fully geared to benefit mainly from their franchise and retail mall operations once the current COVID-19 situation will push the local economy to sail within calmer waters. Once this situation is overturned, we should see an increase in consumption in terms of the Group’s franchise operations. 

Although the outlook of the local economy still remains uncertain, this does not mean that long-term investors shouldn't consider building up positions in companies with unique business models, including PG, that have the necessary characteristics to weather the storm in these unprecedented times. In the medium to long term, once all of this is over, we expect PG’s share price to reflect its solid fundamentals and attractive business profile.

Disclaimer: This article was issued by Andrew Fenech, research analyst at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.