Coronavirus - Higher risk lower return
1 July 2020
Major events looking to get back up and running after the crisis will likely have to do so without cancellation insurance for communicable diseases. Wimbledon says it will not be able to get similar cover next year and World Athletics said insurance policies are no longer available for coronavirus. Lloyd’s of London has estimated that global insurers will pay out $100bn this year due to the virus, including for cancelled sports, music and industry events, so the reluctance is understandable. However, events companies stressed after 2020 might not be willing to take on the risk of running events in 2021 with the chance of a second wave.
• US buys majority of remdesivir supplies.
• Walkers confirms 28 positive cases at its site in Leicester.
• EU publishes 15-country “safe travel” list.
• Australia extends lockdown in Victoria.
Buildings & Construction
• James Latham – “The board responded quickly and decisively to protect the business and the employees from Covid-19, with quick action to reduce costs where possible, manage the stock and preserve cash. Covid-19 has had a considerable affect on the start of our trading year. We remained open at most of our distribution sites to support NHS projects and other essential services, as well as servicing our customers that managed to remain open. April was a particularly challenging month with sales at 40% of April 2019 sales. We have seen more customers coming back to work throughout May, with positive trends on numbers of orders taken and total number of trading customers, with sales at 60% of May 2019 sales. This positive trend is continuing in June, and sales are expected to be 80% of June 2019 sales. I have been incredibly pleased at how our staff have managed to work through this challenging period, and the resilience of the business. The skill of our senior staff with the support of the board has undoubtedly limited the negative impact of Covid-19 on the business. The full impact of the virus and the effect on the wider economy are impossible to predict at this stage.”
Food, Drinks & Household
• Sainsbury’s – “The Covid-19 pandemic continues to have a significant impact on our business and we are guided by three clear priorities: keeping customers and colleagues safe; helping to feed the nation and supporting our communities and the most vulnerable in society.
At our Preliminary results announcement in April, we set out our base case assumptions for the current financial year and we are pleased that our sales performance to date has been ahead of those assumptions, helped by good weather. We delivered double digit sales growth in Grocery, ahead of the market, driven by very strong online growth. This builds on strong grocery momentum and market share gains over the last year, as we invest to lower our prices and improve our stores.
Our digital performance has been particularly strong, with sales more than doubling. Our ability to quickly respond to customers choosing to buy groceries, general merchandise and clothing online reflects the strength and flexibility of the digital and technology platforms we have built. From the beginning of the crisis, we chose to prioritise elderly, disabled and vulnerable customers for groceries online; sales grew by 87 per cent year-on-year and orders from around 370,000 to over 650,000 per week. Nearly 50 per cent of new groceries online customers are new Sainsbury's customers. SmartShop, which lets customers scan their own groceries and use a separate checkout, reached 37 per cent of sales on average and exceeded 50 per cent in some stores. We have also rolled out our one-hour grocery delivery service Chop Chop beyond London and it is now in 15 cities.
While all 573 Argos standalone stores were closed for the majority of the quarter, customers could shop with Argos online for home delivery and click and collect from Sainsbury's stores. As a result of this, Argos performed very well, growing 10.7 per cent, with home delivery sales up 78 per cent and click and collect sales up 53 per cent. Lockdown measures started to ease towards the end of the quarter and we opened 174 stores across the UK and Ireland in phase one and will open 100 more in phase two in July.
Clothing and Fuel sales, whilst still down year on year, have started to recover more quickly than expected and our Financial Services business has an improved capital position versus the year end.
Sales growth has remained strong throughout the first quarter, ahead of the base case assumptions we detailed in April, particularly at Argos. This has been helped by good weather. Operating costs remain high, reflecting the costs of keeping customers and colleagues safe, significantly higher online participation, including prioritisation of elderly, disabled and vulnerable customers, and weak sales of fuel, clothing and general merchandise within Sainsbury's stores.”
• RHI Magnesita#– “The business has responded well to the challenges presented by Covid-19. Whilst volumes have declined significantly in the second quarter 2020, in-line with our customers' volumes, the business remains resilient, particularly with regards to liquidity. In addition, we are continuing to take action to accelerate the delivery of our strategy and to strengthen the business for the longer term.
Challenging environment in Q2 2020 – The primary focus of the business has been on the health and safety of employees, customers and business partners. The Company has also continued to supply customers seamlessly and maintained a fully functioning supply chain.
Consistent with our expectations at the time of the Q1 2020 Trading Update on 5 May 2020, there has been an unprecedented slowdown in customer activity and a significant fall in demand in May and June. This effect has caused a material drop in RHI Magnesita's revenues across both the Steel and Industrial divisions in the second quarter (down almost 20% versus Q1 2020, in line with our scenario planning). Within our business units, Cement and Steel MEA/Asia have remained resilient, offset by further weakness in Steel Europe, Steel South America and Steel India. Activity levels are likely to remain subdued through July and August, with limited visibility beyond this period.
Raw material prices fell over the first four months of the year, due to over-supply from China. There has been some stabilisation in prices in May and June and at current raw material prices the Group continues to derive a positive margin from its backward integration.
Focus on cash preservation and cost management – Against the challenging backdrop of Covid-19, mitigating actions continue to be taken to minimise the financial impact, and the business has moved swiftly to implement cost management and cash preservation measures. These include, the temporary closure of three plants in Europe and one plant in Mexico, the introduction of short time working arrangements in some plants, the deferral of €45 million of capital expenditure in 2020, no 2019 final dividend being paid, and other fixed cost reduction actions. These measures have resulted in the successful delivery of further short-term cost savings in Q2 2020.”
• Smith & Nephew – “Announces that it expects a second quarter underlying revenue decline of around -29%. This is in line with our previously published outlook for underlying revenue for the quarter to be substantially down year on year, as major markets were impacted by the Covid-19 pandemic.
We are encouraged by the improving performance as the quarter progressed, with underlying revenue declines of -47% in April (as previously disclosed), -27% in May, and around -12% in June. Performance was correlated strongly with the easing of lockdown restrictions and resumption of elective surgeries. Nevertheless, there continues to be significant uncertainty and geographical variation. The impact of the Covid-19 pandemic has been most pronounced on our Orthopaedic Reconstruction, Sports Medicine and ENT businesses, driven by lower levels of elective surgery in the quarter. Our Advanced Wound Management and Trauma businesses have been more resilient.
As a result of the trading performance across the first and second quarters, we continue to expect that the first half trading margin will be substantially down on the prior year. An update on this, and our progress across the Group on controlling discretionary costs, will be included with our second quarter and first half results, which will be reported as planned on 29 July 2020.”
• British Land – “As at 30 June, 894 of our stores in England were open, representing 64% of total. 116 stores in Scotland were open (50%) and 43 stores in Wales were open (64%).
For the week commencing 14 June when restrictions were eased on non-essential retail in England, footfall at our English assets was 64% of the level achieved in the same week last year. Encouragingly, like-for-like retail sales for stores that were open were 91% of the same week last year.
We expect the best located, open air retail parks to perform an important role in retailers' reopening strategies, and this was reflected in positive like-for-like sales for out of town stores open in England versus the same week last year.
Our London campuses and our standalone offices buildings have remained open throughout, although physical occupancy remains low. We are working with our customers and have agreed comprehensive plans to enable a safe return to work, when appropriate, which are now operational and working well.
June Quarter rent collection update – As of 26 June, we had collected 88% of rent for Offices and 36% in Retail (including at our London campuses) relating to the June Quarter.
We continue to engage with customers on a case by case basis. For smaller, independent operators, primarily in food & beverage and retail, we have agreed rental waivers of £3m in relation to the June quarter in addition to £2m in relation to the March quarter, which we announced in our FY20 results. We are holding productive discussions with larger retail and leisure operators who have been disproportionately affected by lockdown. These include moves to monthly rents, deferrals and partial settlement of March and June rents, typically in return for the removal of lease breaks, lease extensions, reduced incentives or commitments for additional space. This is an ongoing process and so we expect the collection rates for June to improve over the coming weeks.”
• Hammerson – “Covid-19 has had an unprecedented impact on many businesses. Following the closure of our flagships (except for essential retail) we have supported our occupiers, particularly smaller and independent brands that are less resilient to the temporary closures. All discussions with brands regarding rent deferrals, monthly payments, and waivers have been on a case-by-case basis, taking into account the business model, risk profile and ability of the occupier to pay, alongside the support made available by the relevant governments.
In the UK and Ireland, 73% and 72% of H1 rent has been collected respectively and the Company remains confident of material increases in Q2 and Q3 collection rates across all categories as negotiations are concluded with brands. A portfolio update will be given at the time of the half year results.
UK– Across the UK portfolio, non-essential retail has been open in line with government guidelines since 15 June, with the exception of the Scottish assets which are expected to re-open on 13 July. F&B units will be able to open from 4 July in England and mid-July in Scotland, and 80% of stores which are eligible to trade in flagship destinations have reopened.
Of the rent due for the 28 February and 25 March UK quarter days (Q2), we have now received 47%. The balance (53%) remains in negotiation following the UK Governments recently published Covid-19 Code of Practice.
Of the rent due for 28 May and 25 June UK quarter days (Q3), we have received 16% as at the end of 29 June (3 days post quarter day).
France – In France, half our flagship destinations re-opened from 11-13 May, and all have been trading since 2 June. All brands and F&B operators within the flagships are now trading with the exception of the theatre and concert hall at Italie Deux, Paris. Of the rent due for the 1 April quarter day, 12% has been collected, with the outstanding balance still under discussion.
The French Government initially mandated that rent for April was deferred, with a Code of Conduct subsequently introduced allowing rent during the closure period to be deferred further to 30 September for retailers who require assistance.
With the French quarter day falling on 1 July, it is too early to give an update on Q3 collection rates.
Ireland – As with the UK, Irish centres have been fully open since 15 June. Of the rent due for the 1 April quarter day, 47% has been collected, with the balance in negotiation.
As with France, the Q3 quarter day falls on 1 July and it is therefore too early to comment on Q3 collection rates.
Premium Outlets – All premium outlets held by Hammerson's interests in Value Retail and VIA Outlets are now trading, in line with government directives in the relevant regions.
As these destinations are independently managed and financed, it is not possible to give an update on Q2 collections although is it likely the level of deferments and waivers will be higher than in the managed flagship portfolio. It is also not possible to quantify the impact on Q3 at this stage.”
• HML – “We do not foresee any long-term impact on the Group’s wider strategic plan, however in the short-term, a reduction in housing transactions will reduce a number of the ancillary revenue streams, which will materially impact the Group’s financial performance in FY2021. For FY2022 the Board intends to focus on accelerating the digital transformation of the Group’s processes to see promising levels of adoption
in all branches. This will improve the business output and the Group will be able to take advantage of recent acquisitions along with recent restructures and demonstrate growth in all areas as the management team matures. The intention of the digital transformation is to help reduce the burden of maintaining a geographically spread branch network and adopt more regional hubs along with engaging locally with clients through readily accessible digital tools. All of which will positively improve our business whilst we continue to deliver good property management of buildings.”
• Sirius Real Estate# – “Cash Collection – Following on from a strong cash collection performance compared with the normal working pattern in April and May 2020 of over 98%, cash collection for June 2020 achieved 99.8% of its normal working pattern.
The consistency of cash collection is reflective of the Company's breadth of tenant base, ability of its staff to engage with and manage its tenants and the decisive manner in which the Company has been managing throughout the crisis, as well as the efficiency with which the German Government has acted to support businesses.
A small number of tenants facing Covid-19 related financial difficulties have requested deferral of rental and service charge payments. These are being addressed on a case-by-case basis and have had very limited impact on cash flow at this point.
Enquiries/New Lettings – Following a previously reported brief reduction in the run rate of core enquiries at the end of March 2020 after making adjustments to the marketing strategy, enquiry levels have returned to normal levels of above 1,200 per month in April, May and June 2020.
These enquiry levels have led to 165 new lettings in June 2020 covering 11,242 sqm and generating €877,000 of annualised rental roll compared with 130 new lettings/11,282 sqm in May 2020 and 115 new lettings/8,025 sqm in April 2020. Like-for-like annualised rent roll as at end of June 2020 in comparison to end of March 2020 has reduced by circa €478,000 (from €89.6 million at 31 March 2020).
The demand for space remains good with an increase in the demand for storage space. However, it is encouraging that of the 30,549 sqm of new lettings that were completed in April, May and June 2020, 40% of those new lettings relate to out of town conventional or flexible office space.”
• B&M – “Group sales revenue for the quarter increased by 27.5% on a constant currency basis. On an actual currency basis, total sales revenue increased by 27.7% to £1,154.8m (2019: £904.6m).
B&M UK sales revenue for the 13 week period increased by 33.7% to £987.8m (2019: £738.9m), with like-for-like ("LFL") sales growth of 26.9% in the quarter against a prior year comparable of +3.9%.
The LFL customer count gradually recovered over the quarter after the initial decline during lockdown, whilst the average transaction value has been at significantly elevated levels.
At the end of the quarter the B&M UK business had 656 trading stores, versus 632 at the same quarter end in FY20. Heron Foods now trades from 295 stores, having opened a net 2 stores in the quarter. The store opening programmes at both B&M and Heron Foods this quarter have been significantly impacted by the Covid19 pandemic.
In this financial year the B&M UK business is expected to open at least 30 net new stores and Heron Foods to open at least 15 net new stores. Both programmes will be loaded towards the back end of the financial year.
The B&M store format and product range will continue to be developed in France over the year ahead. 3 more new stores will open this financial year in France, all under the B&M banner.
Against a highly uncertain economic backdrop and continued impacts from Covid19, B&M is in a strong position to continue to grow profitably in the UK and work continues to develop and prove the proposition in France.”
• Macy’s Inc – “Reported results for the first quarter of 2020. As previously reported, the company had net sales of $3.017 billion.
Nearly all of the company’s stores have now reopened, including stores in the major metropolitan regions. Stores continued to perform ahead of expectations through May and June, and the company's digital business sales remained strong across geographies. The company continues to expect a gradual sales recovery.
‘The first quarter of 2020 was challenging for the country, the industry and Macy’s, Inc. While our stores are re-opened, we expect that the Covid-19 pandemic will continue to impact the country for the remainder of the year. We do not anticipate another full shutdown, but we are staying flexible and are prepared to address increases in cases on a regional level,’ said Jeff Gennette, chairman and chief executive officer of Macy’s, Inc. ‘We are meeting our customers how and where they are shopping and have enhanced our fulfilment options and health precautions to ensure a safe and welcoming shopping experience.’
‘While we continue to see challenges ahead, we’ve taken the necessary actions to stabilize our business and give us financial flexibility. We are confident we have the right strategy and plans in place to navigate the shifting retail landscape,’ Gennette continued.
Primarily as a result of the Covid-19 pandemic, the company’s long-term projections and market capitalization changed, requiring interim impairment assessments for its goodwill and long-lived assets. As a result of these assessments, the company recognized pre-tax, non-cash goodwill and long-lived asset impairment charges of $3.1 billion and $80 million, respectively, during the 13 weeks ended May 2, 2020. The company is now reporting a Diluted loss per share of $11.53 and Adjusted Diluted loss per share of $2.03.”
• SSP Group – “The trading scenario we presented at our Interim Results on 3 June 2020 assumed an almost total shutdown of the travel market for the whole of the second half of our financial year. In this scenario, we envisaged Group revenue being down approximately 80% to 85% in H2 2020 against the same period last year and an underlying EBITDA loss of between £120m and £190m and operating loss of between £180m and £250m for the second half year, the final out-turn depending on our ability to manage the profit conversion on the reduced sales.
With the global lock-down continuing, and as we indicated in June, sales in April and May were approximately 95% below last year. During June sales have recovered slightly and are now running at approximately 90% below last year, with stronger performances in Continental Europe and North America reflecting the gradual easing of lockdowns in these regions offset by the UK and Rest of World, where sales remain below this level.
Despite the low level of sales across the Group, the impact on operating profit is being mitigated by the speed and the extent to which we have been able to reduce operating costs and hence our expectations for operating losses and EBITDA in H2 remain within the ranges indicated above, prior to restructuring costs, even if we see sales remain at the current run rate until the end of the financial year.
UK Outlook and Reorganisation – The impact on passenger travel arising from Covid 19 resulted in the closure of almost all of our units in the UK. Our intention was to re-open units and bring back our teams as rapidly as possible once passenger demand recovered, having accessed the UK Government's furlough scheme. The reality is that passenger numbers still remain at very low levels, a reflection of the extent and duration of the current restrictions in place. In the Rail sector, which represents the majority of SSP's UK operations, passenger numbers remain c. 85% lower YOY and the UK Air sector has to date been largely closed.
The proposed introduction of air bridges and the start of the holiday season may lead to some limited return of short-haul air travel demand in July, although capacity is expected to be significantly reduced, and long-haul travel is anticipated to remain at extremely low levels. With the current social distancing measures remaining in place, the recovery in passenger numbers in the rail sector is expected to be prolonged.
As a consequence, our expectation is that by the autumn only around 20% of units in the UK will have opened. We have therefore come to the very difficult conclusion that we will need to simplify and reshape our UK business, and we are now starting a collective consultation on a proposed reorganisation. If the pace of the recovery continues at the current level, this could lead to up to c. 5,000 roles becoming redundant from within the Head Office and UK Operations. Clearly, these decisions are very difficult, and our priority is to conduct this process fairly and to support those affected.
Our initial assessment is that the costs associated with this will be in the region of £8m-£10m.
At this stage, we have not commenced restructuring of a material scale in any other geographies due to our expectations of a more rapid recovery, the longer durations of furlough support or our contractual lay-off arrangements.”
• TM Lewin –Has announced it will close all 66 of its UK shops. About 600 workers will lose their jobs.
• Topps Tiles# – “Retail trading over the third quarter improved significantly as stores re-opened, with average sales per week growing from £0.8 million during April (when all stores were closed) to £3.9 million in the final week of June when all stores were trading, which was 5.4% below the same week in the prior year on a like for like basis. The Board is pleased by this performance, which was ahead of its revised expectations following the outbreak of Covid-19.”
• Kier# – “Covid-19 has adversely affected the Group’s revenue and resulted in it incurring additional costs, some of which are expected to be treated as exceptional. However, the Group’s underlying performance has remained resilient, as it has continued to deliver critical national infrastructure projects and provide services across a range of sectors with, on average, c.80% of the Group's sites remaining open during the period. Almost all of the Group’s sites are now open and the Group is focusing on driving on-site operational efficiencies, whilst working in accordance with new site operating procedures.
Outlook – The Group continues to win high quality work in its key markets and across a range of sectors. As at 31 May 2020, the Group’s order book was c.£7.6bn; c.60% of our core Construction and Infrastructure Services' businesses' order book relates to work for Government departments or quasi-governmental entities and a further c.25% relates to the provision of services to regulated entities.
On 15 April 2020, the Government issued the ‘notice to proceed’ for the next stage of the HS2 project, following which the Group (in joint venture) has been undertaking pre-contract mobilisation activities. Contracts awarded to the Group during the period include the £97m Heartlands Hospital project for University Hospitals Birmingham NHS Foundation Trust. The Group also secured places on a number of frameworks during the period, including Lots 1 and 2 of the £2.6bn Thames Water AMP7 Capital Programmes Framework (Runway 2).
The Group is a Strategic Supplier to the Department for Education and a leading provider of education facilities. The Group is therefore well-placed to identify opportunities under the new, 10-year capital investment programme announced by Government on 29 June 2020, which provides for c.£1.5bn of investment in building, repairing and upgrading the UK’s schools.
Whilst the Group anticipates that the effects of Covid-19 will continue to affect volumes and result in additional costs as the Group adapts to operating in a post-Covid-19 environment, the strength of the Group’s order book, its expertise in managing complex projects and its long-standing client relationships enable the Group to remain confident in its outlook for the financial year ending 30 June 2021.
Strategic actions – The Group has made good progress in relation to the delivery of the strategic actions announced in June 2019:
• Cost savings: the Group now anticipates cost savings of c. £100m in the financial year ending 30 June 2021, with costs associated with these savings having been incurred in the current financial year.
• Living: the new management of Living has re-organised the business into a smaller, more disciplined organisation, with a focus on cash generation.
•Property: the Group continues to take steps to ensure that the capital allocated to the business remains at an appropriate level and is effectively deployed.•Non-core businesses: the Group has substantially exited its Environmental Services business and has rationalised its Facilities Management business, which now seeks to identify synergistic opportunities with the Construction business for the benefit of the Group.Before Covid-19, the Group had made good progress in implementing a number of measures to reduce its net debt and strengthen its balance sheet. As a result of Covid-19, over the next 12-18 months, further actions will be taken, including: continuing to implement a range of self-help measures, driving a further increase in the Group's operating cash flows, continuing the process to sell Living and a potential equity issue.Net debt – The Group continues to manage its net debt position closely and has introduced a number of disciplines to improve its working capital management and to continue to reduce the number of days taken to pay the supply-chain. The reduction in the Group’s revenue due to Covid-19 has resulted in a lower level of working capital inflow in the period than in the equivalent period in previous years. The Group’s average month-end net debt for the current financial year is expected to be c.£440m. Covenant waivers – In order to provide financial flexibility for the Group following Covid-19, the Group has agreed waivers with its lenders in respect of the Group’s financial covenants for the test period ended 30 June 2020. The Group continues to engage with its lenders to ensure that sufficient flexibility under the Group’s principal finance facilities remains available."
•Singapore has further lifted restrictions -– Under Singapore’s ‘Phase 2’,non-essential retail stores, gyms and most businesses are allowed to re-open. Dine-in services in restaurants and cafes will also resume. Gatheringsof more than five people however, aren't permitted.
•In Wales, all non-essential shops can reopen, providing they follow socialdistancing rules from Monday. The housing market will begin to reopen –with viewings able to take place. Outdoor markets can also reopen, alongwith outdoor sports courts for non-contact sports, as well as places ofworship for private prayer. Childcare facilities will begin to reopen on aphased basis.
•The EU has agreed to allow visitors from 15 countries outside the bloc.The “safe travel” list includes Canada, Japan and New Zealand, butexcludes countries with high infection rates – including Brazil, Russia andthe US. Link
•US President Donald Trump’s administration has secured almost all theworld's upcoming supply of the drug remdesivir. The drug, produced bythe firm Gilead Sciences, is the first approved by authorities in the US tobe used to treat Covid-19. A statement from the Department of Health andHuman services says the deal with Gilead for 500,000 doses, which amounts to 100% of Gilead's production in July, 90% of it in August and 90% in September.
• Wigan Athletic has gone into administration, becoming the first English professional club to do so since the coronavirus pandemic began.
• Volkswagen has said it will not build a new factory in Turkey because of the coronavirus pandemic. The carmaker had last year postponed a decision on whether to go ahead with the factory because of Turkey’s incursion into Syria.
• The International Labour Organization (ILO) estimates that by the mid-year point, global working hours were down 14% compared with last December – equivalent to 400m full-time jobs.
• Joe Biden has announced he won’t hold campaign rallies for November’s presidential election.
• In Australia, 73 new cases have been reported in Victoria and 36 Melbourne suburbs return to lockdown.
• Brazil’s government will restrict the entry of foreigners to the country for 30 days. Foreigners with permanent residence in Brazil or working authorisation will be exempted.
#corporate client of Peel Hunt