Coronavirus - Learning from the best
18 May 2020
President Xi Jinping defended China’s coronavirus response in the face of criticism from the US and others at the World Health Assembly in Geneva, saying: “We have provided information to the WHO and relevant countries in a most timely fashion”. Dr Tedros Adhanom Ghebreyesus defended the WHO’s response, arguing it gave countries ample warning, guidance and advice. No country or organisation involved will be completely unmarked but some have been more effective than others. There is little point in assigning blame. The best way forward is to address the shortcomings collectively so we are better prepared for future outbreaks.
• Scotland aims to ease lockdown on 28 May.
• Japan falls into recession as GDP declines 3.4% in Q1.
• The German Bundesliga restarted over the weekend.
• In the UK, those over the age of five with symptoms are eligible for testing.
• French deaths rose on Sunday, as deaths in nursing homes spike.
Buildings & Construction
• Inland Homes – “The decision follows the Government's recently updated guidance which removed the restriction on non-essential home moves and supported the return of activities related to the sale and purchase of homes.
The Group’s number one priority remains the health and wellbeing of employees and customers. It is therefore implementing measures to ensure full compliance with the Government's Covid-19 Secure guidance. The Group has also become a signatory to the Home Builders Federation (HBF) ‘Charter for Safe Working Practice’. The Charter is a public facing commitment which supports the protocols individual builders have in place to protect the health and safety of the home building workforce, visitors to site and the local community.
In order to ensure social distancing, visits will be by appointment only and limited to two people from the same household. Perspex screens will be installed on desks where possible and hand sanitiser, face masks and gloves made available to both staff and visitors as additional precautions. Show home surfaces such as door handles, worktops and white goods will be sanitised before and after each viewing.
The Group is using its website and social media channels to communicate to customers the changes being implemented.
Inland Homes builds homes in areas of high demand and structural under supply in the south and south east of England. To recognise the efforts of ‘key workers’ in this pandemic, the Company is offering a ‘key worker’ discount on home purchases. Inland is also pleased to be launching a number of offers on its home sales for all other customers.
Following reiteration of the Government’s support for construction activity and in line with prevailing safety guidance, construction has continued on sites across the Group’s activities where it makes commercial sense in the build progress to do so. This includes two cash-generative partnership housing sites under construction for Registered Providers. Three sites under construction remain closed and a decision about when and on what basis to reopen these sites will be made in the coming weeks.”
• Ford – Has resumed operations at its engine plants in Dagenham and Bridgend, meaning all of its European factories are now back at work.
• Vauxhall – The company’s van factory in Luton has reopened with half its normal staff level.
Mitchells & Butlers – Mitchells & Butlers announces today that the temporary waiver it has been granted, as previously announced, against possible technical default due to enforced closure of the business has been extended to 8 June.
• Hochschild Mining – “Is today announcing that it has met all the requirements established by the Peruvian government to restart operations at the Inmaculada and Pallancata mines. Following the fulfilment of strict government health protocols, the Company plans to begin ramping-up progressively to achieve full production in the coming weeks.
As previously announced, the San Jose mine in southern Argentina also recently restarted operations and is following a phased ramp-up process. Hochschild expects to reissue its full-year guidance once full production is achieved and the overall impact of the suspensions is clear. In line with current government guidelines, the Company's brownfield exploration programme is expected to recommence in July.”
• Sylvania Platinum – “The Company today announces an update on the status of the Sylvania Dump Operations (‘SDO’) following the easing of Covid-19 restrictions on mining companies announced by the South African Government on 16 and 29 April 2020 respectively, under the Disaster Management Act of 2000.
The SDO commenced with scaled-down operations on 1 May 2020 and management has endeavoured to ramp up and maximise production under the strict conditions stipulated by Government and the Minister of Mineral Resources and Energy. All six operations are now running, albeit at reduced but stable throughput, and started to dispatch PGM concentrate during the past week. The teams at all the SDO sites are to be commended for their commitment and hard work in ensuring that the operations started up with minimal difficulty whilst prioritising the safety of all employees.
The protection, health and safety of all employees continues to be Sylvania's highest priority and will extend beyond the end of lockdown. The required measures are in place to ensure compliance with relevant regulations and the application of all the necessary training, health, hygiene, safety and personal protective procedures that are required to keep the Group's employees safe.”
• Intu Properties – “On 1 May 2020, Intu Properties plc announced a waiver of certain potential breaches in respect of its revolving credit facility until 26 June 2020, and that it was extending its engagement to key stakeholders of the group at the asset level as it explored all options, including potentially seeking standstills to overcome the current market dislocation.
Discussions have been ongoing since then and today Intu provides an update on its current plans as part of its ultimate strategic objective to fix the balance sheet over the medium term.
Significant market uncertainty remains regarding the impact of Covid-19 on the operations of Intu's centres which, with the exception of essential stores, remain semi-closed until at least 1 June 2020. Additionally, at this time, the speed of recovery once the UK comes out of lockdown remains unclear.
The resulting impact on rental collections and valuations at the end of June is likely to result in breaches of covenants or material liquidity requirements if any such breaches are to be cured in accordance with the financing documents at that time. This market backdrop, where the investment market is effectively closed, also creates material uncertainty for any asset disposal or additional funding process which Intu might pursue to address these covenant issues.
Intu believes that in order to provide a stable environment in which to address this situation, standstill-based agreements with relevant financial stakeholders across its structures, at both the asset and the group level, are the best course of action and its primary focus to maximise value.
These standstill arrangements would seek relief from financial covenant testing, debt amortisation and facility maturity payments for a period through to no later than 31 December 2021. The standstill provisions would also aim to achieve self-funded operational and financial costs only across the different property owning sub-structures, without recourse to Intu properties plc for any shortfalls during the standstill period with interest being ‘pay if you can’.
Intu believes that the best way forward is achieving stability through such a standstill until the market dislocation has stabilised and asset valuations and portfolio performance can be better understood by investors and debt providers and risk can be appropriately priced. When market dislocation has passed, there will be greater opportunity to explore alternative capital structures and solutions and disposals to ultimately fix the balance sheet.
Intu will seek to promote fairness and stability in its standstill proposals recognising there is risk of competing interests across group wide stakeholder interests during this period of market dislocation.
There can of course be no certainty as to whether any standstill can be achieved with all or some of the group's creditors, or as to the terms. Whilst the standstill is the primary focus, it is possible that earlier individual breaches, under certain of the group's financings, could occur over the coming weeks and the group will seek to address such instances as part of the wider discussions.”
• Ryanair – “Most of Ryanair's fleet was grounded from mid-March by EU Government flight bans and restrictions. These groundings reduced our March and full year traffic by over 5m guests and cut FY20 profits by over €40m. As updated on 1 May, Ryanair expects to operate less than 1% of its scheduled flying programme in Q1 (Apr to June). Some return to flight services is expected in Q2 (July-Sept) and Ryanair expects to carry no more than 50% of its original Q2 traffic target of 44.6m, as bookings will be impacted by public health restrictions (temperature checks and face coverings for passengers and staff) and quarantine requirements. When Group airlines return to scheduled flying from July, the competitive landscape in Europe will be distorted by unprecedented quantums of State Aid (in breach of EU rules) under which over €30bn has been gifted to the Lufthansa Group, Air France-KLM, Alitalia, SAS and Norwegian among others. We therefore expect that traffic on reduced flight schedules will be subject to significant price discounting, and below cost selling, from these flag carriers with huge State Aid war chests.
BUSINESS REVIEW (FY20): – Revenues – Sales grew 10% to €8.5bn. Scheduled Revenue, driven by 4% traffic growth to 149m and 2% higher fares, increased by 6% to €5.6bn. Covid-19 flight restrictions and aircraft groundings in the 2nd half of March reduced traffic by over 5m in Q4. Ancillary Revenue rose by 20% to €2.9bn as more guests choose Priority Boarding and Preferred Seat services. In Oct, Ryanair Labs launched a new digital platform with improved, personalised, guest offers. This bedded down well in Q4, prior to Covid-19 groundings, with Labs focusing on improved penetration across core ancillary products.
Costs – Our fuel bill rose 14% (+€335m) to €2.8bn due to higher prices and 4% traffic growth. Ex-fuel unit costs were adversely impacted by a 48% drop in March traffic (-5.2m guests) due to Covid-19 groundings and, as a result, rose by 4% (ahead of the +2% guided). Higher staff costs (increased pilot pay & higher crew ratios as pilot resignations slowed to zero) and maintenance costs (older aircraft longer in the fleet due to the Boeing MAX delivery delays) were offset by falling EU261 costs (due to better on-time-performance) and lower route charges. The Group has recorded an exceptional €353m (net of tax) hedge ineffectiveness charge on FY21 fuel hedges (due to Covid-19 groundings), offset by favourable €/$ currency hedges for fuel & delayed capex. FY21 will be difficult for the Ryanair Group as its airlines work hard to return to scheduled flying following the Covid-19 crisis. Unlike many flag carrier competitors, Ryanair will not request or receive State Aid. Consultations about base closures, pay cuts of up to 20%, unpaid leave and up to 3,000 job cuts (mainly pilots and cabin crew) are under way with our people and our unions. Our Commercial team are also in active discussions with our airport partners regarding S.20, and beyond, capacity allocations Given the uncertainty over the impact and duration of the Covid-19 pandemic, coupled with no visibility on what customer behaviour and demand will be following a return to service, Ryanair cannot provide FY21 PAT guidance at this time. The Group expects to record a loss of over €200m in Q1, with a smaller loss expected in Q2 (peak summer) due to a substantial decline in traffic and pricing from Covid-19 groundings. The Group currently expects to carry less than 80m passengers in FY21 (almost 50% below its original 154m target). Ryanair's return to scheduled flying will be rendered significantly more difficult by competing with flag carrier airlines who will be financing below cost selling with the benefit of over €30bn in unlawful State Aid, in breach of both EU State Aid and competition rules.”
• eEnergy Group – “Has launched a specialist sanitisation service to support schools in the UK and Ireland as they prepare for the return of pupils.
Through its subsidiary eLight, the Group helps businesses and schools switch to LED lighting for a fixed monthly service fee, avoiding any upfront payments (known as Light-as-a-Service or LaaS). For schools, the benefits of LaaS are compelling. Schools can unlock cash savings while significantly reducing their carbon footprint. For example, one secondary school which recently signed with eLight is expected to release £500,000 of cash over a 10-year period without any capital costs.
As well as installing the LED lighting, eLight is now offering schools the opportunity to sanitise their buildings as well. The whole package is entirely funded through the energy savings created by the change to LED lighting. To further incentivise schools, eLight is also offering a three-month payment holiday if they make the switch to LED lighting before September 2020.
eEnergy is already a leading supplier of energy efficiency services to the education sector in the UK and Ireland. eLight has completed installations of LED lighting at 170 schools over the last three years, with 21 undertaken in 2020. The directors of eEnergy estimate that 70-80% of UK independent schools have not yet transitioned to energy-efficient lighting.
Since the start of the lockdown, many schools have started to look at energy reduction projects while there are no (or reduced numbers of) pupils on site. Demand for eLight's service is gaining momentum, and the Group is currently assessing over 200 school projects. Based on current conversion rates, eEnergy expects to convert over 40% of these projects into signed contracts.”
• LXI REIT# – “The Group’s business continuity plan is working well, and we are prioritising the health and safety of our people as well as those of its tenants and other counterparties
The portfolio is highly diversified, as described in the operational highlights above, with exposure both to sectors that continue to be largely unaffected by the crisis as well as to some that are experiencing unprecedented short-term disruption
Although the majority of the Group's tenants continue to pay their rent as normal, £3.3m of the quarterly rent roll was unpaid as at the quarter date in March, representing 6.8% of the Group's £48.3m annual contracted rent roll The Investment Advisor has been in negotiations with those tenants that had not paid their quarter's rent and provides the following update, which demonstrates good progress towards recovery of the vast majority of the unpaid rents:
• £1.7m is now subject to agreed terms with the tenant, which represents 3.6% of the Group's contracted annual rent roll. Of this amount: i) £0.3m has been received in cash;
ii) £1.2m is now due to be paid within three months;
iii) £0.2m is now due to be paid between three and twelve months; and
iv) less than £0.1m has been given as a rent concession
• £1.6m remains the subject of detailed discussions with the tenant, which represents 3.2% of the Group's contracted annual rent roll. The Investment Advisor expects the majority of this to be received within 12 months
The Company notes the reopening of garden centres on 13 May 2020 and the Government's current planning assumptions for the reopening of hotels and pubs, from 4 July 2020, that will support our tenants in those sectors.
The Group's management fee is calculated based on market cap, which has materially reduced since the beginning of March, significantly reducing the Group's total expense ratio over the quarter ending June 2020. This demonstrates the benefit of the alignment of shareholder's interests with management through the Company’s management fee structure.
The Group’s robust debt metrics, described in detail in the financial highlights section below, show LTV of 20%, which we expect to rise to 30% following full drawing of the Group's RCF, and weighted average maturity on the term loans of 11 years.
Construction works are progressing again at all of the Group’s forward funding sites.”
• South Carolina and Maine are expanding their reopening measures today. Retail stores and restaurants will be allowed to open.
• Japan’s economy shrank just under 3.5% in the first three months of the year, according to figures released by the government on Monday.
• Loss of smell or taste has now been added to the official list of symptoms that may indicate Covid-19 in the UK.
• India has extended its lockdown for another two weeks. However, restaurants will now be allowed to operate takeaway services, while sports complexes and stadiums can host events without spectators. Also for the first time since the lockdown was announced, private cars and buses can now operate across cities and towns – as well as crossing state borders if they have permission.
• Lockdown measures in Scotland could begin to be lifted from 28 May. Nicola Sturgeon said the easing of restrictions would mean people could meet someone from another household as long as they maintain social distance. More outdoor activities will also be allowed.
#corporate client of Peel Hunt