Coronavirus - Looking for the good news
20 March 2020
It is easy to focus on all the problems, so we are including some good news to highlight where things are getting better and companies are seeing a benefit. It is worth noting that the accounting profession has made the crisis considerably worse for a company with leases. This may not have been intentional, but the decision to include leases as debt has changed the balance sheet structure and this has been included in consensus forecasts. In a crisis, investors focus on companies with leverage and some indiscriminately sell without a proper understanding of the balance sheet. This should be addressed to ensure that it cannot happen again.
Cases - 26,111 Deaths - 1,080
Cases - 245,102 Deaths - 10,030
Countries - 178
• Cathay Pacific – cutting April & May capacity by 96%.
• California has announced a statewide lock down.
• Competition law relaxed.
• Farnborough Air Show in July cancelled.
• Coca-Cola warning.
• Insurance specialists call for pragmatism on pension deficits.
• CMC has issued a profits upgrade.
• China has reported its second day of no locally transmitted cases.
• Dominos in the US is hiring an extra 10,000 staff.
• Corporate bond market is reopening. Unilever’s €1bn offering has been upsized to €2bn after being >11x oversubscribed.
• Lidl UK recruiting up to 2500.
• Asda is recruiting over 5000 new staff.
• Aldi is recruiting 4000 permanent staff and 5000 temporary.
Competition law relaxed
The CMA has welcomed the government’s announcement to relax some elements of competition law, to enable businesses to respond to the crisis. This will help businesses to supply essential products and services, such as groceries.
Insurance specialists call for pragmatism on pension deficits
Aon has called for The Pensions Regulator (TPR) to adopt a “pragmatic” approach to the 15% of UK schemes that have valuation dates within the next three weeks. Aon has warned that funding valuations would be "difficult", with FTSE 350 scheme deficits calculated to have risen by £40bn over the first quarter of this year.
• Travis Perkins (note) – ‘recent trading has not yet shown a significant sales impact as a result of Covid-19. However, due to the rapidly evolving situation and the dynamic UK Government response to the impact of Covid-19, the Group expects the trading environment to change quickly and materially in the coming weeks.
In response to this, the Board is:
• suspending of the proposed full-year 2019 dividend;
• pausing of the Wickes demerger process’.
• CMC (note) – ‘The heightened trading activity experienced at the end of February and highlighted in the 3 March trading update has continued into March. The Group has experienced continued high levels of client trading activity over the Period which has been in excess of double that seen in more normalised market conditions in both our CFD and stockbroking businesses. During the Period, the retention of client income has remained strong. This leads the Board to expect to deliver net operating income ahead of current market consensus for the year ended 31 March 2020 with nine trading days remaining in the financial year.’
• Johnson Service Group (note) – ‘In recent weeks the Group has started to experience a slowdown in certain areas of its operations linked to Covid-19, particularly within our HORECA business, which serves the Hotels, Restaurant and Catering markets. These market segments have seen reduced demand, which has resulted in a significant reduction in our processing volumes, particularly in the last few days. Our Workwear business has seen limited impact to date, although it is reasonable to expect that some Workwear customers will see an impact from Covid-19 in due course.
As a reminder our debt, excluding the impact of IFRS 16, at the end of 2019 was £87.7 million, resulting in a leverage ratio (calculated in accordance with our bank facilities) of 1.3:1 against a bank covenant requirement of not more than 3:1. Debt has remained at a similar level to date and our committed bank facilities are £135 million, running to August 2023.
We have taken immediate action to limit capital expenditure on both plant and equipment and on new textile rental items and have cancelled all non-essential revenue expenditure. We have also commenced discussions with our banks regarding increased bank facilities.
Actions are being taken to reduce operational costs, particularly in the businesses most affected by the drop off in volumes, but also in the wider Group.
Given the current need for prudent cash management, the Board has decided that it will, at the forthcoming Annual General Meeting on 5 May 2020, withdraw Resolution 3 in the Notice of Annual General Meeting relating to the final dividend payment of 2.35p per Ordinary share.
• Foxtons – ‘The business performance in the first 11 weeks of the financial year has been in line with the Board's expectations and consistent with the update given at the full year results at the end February 2020. However, the Company notes the necessary defensive measures taken by the Government affecting London and the UK along with the significantly weakened economic outlook.
It is too early to predict what the impact of Covid-19 will be on Foxtons' full year results. However, we do anticipate an inevitable material disruption to trading in the coming months.
Foxtons is in a strong position as a market leader and continues to manage a strong balance sheet. The group has fully drawn down its £5m revolving credit facility, resulting in a current available cash balance of £21m. The Board is currently evaluating a number of actions to preserve cash and will take all necessary steps to balance these measures with preserving the long term capacity of the business.’
• Future (note) – The recent weeks have been unprecedented. However, our business has continued to trade robustly, with the diversified strategy working well. As of today, we have seen limited impact on our digital revenues. Whilst we have seen declines in the travel outlets within the magazine portfolio, we are seeing y-o-y growth in the grocers, which is partly offsetting the impact of this, and therefore, based on our visibility of our key metrics, we continue to expect trading to remain in line with our previous expectations. However, prudently because of the increased volatility, we have implemented some profit protection measures.
The business continues to be highly cash generative and we expect half-year cash to be in line with guidance. As at the end of the half year, we will have a cash balance of between £47m-£53m. We are hoping to complete the TI transaction in the coming few weeks, subject to the CMA agreement. As a result, the consideration of £140m will become due, which would leave us with headroom in our facilities of c. £30-40m with a combined net debt to LTM pro-forma EBITDA ratio of c.1.0 pro-forma versus our covenant of 3.0.
• Inchcape – Given the ongoing uncertainty around the pandemic, the Board is taking the prudent decision to temporarily suspend the £150m share buyback programme that was launched in February. As reported at FY19 results in February, Inchcape plc has a strong balance sheet and remains
committed to its disciplined capital allocation policy, but the Board believes this is the right decision at this time. To date Inchcape has spent c£25m on the purchase of shares in this programme.
On 27 February 2020 Inchcape published its views on a 2020 outlook. Whilst trading since then has been broadly in-line with expectations, given the rapidly evolving global situation the Board has decided to put on hold any forward guidance until such time that both the severity and duration of the Covid-19 impact on supply and demand becomes clearer. We will update the market as and when appropriate.
• Heathrow – ‘Heathrow will take steps to reorganise and shrink our operation to remain open throughout this crisis. Keeping Heathrow open will enable some passenger services to continue, as well as facilitating cargo operations, which will safeguard vital supply lines for the UK.
Whilst we remain committed to remaining open, Heathrow's financial performance will be significantly impacted by this unprecedented situation. We are taking a number of immediate actions to safeguard the financial resilience of the business. Initial steps we have already taken include reducing operating costs, cancelling executive pay, freezing recruitment and reviewing all capital projects. The management team are reviewing further actions, which can be taken if required and as the situation continues to develop. We have maintained prudent headroom in our credit metrics and have a strong track record of taking actions to support strong investment grade credit ratings. The UK Government has confirmed that it will provide support for the UK aviation sector - including airlines and airports.
Prudent management over the past decade means that our business is well funded and in a robust financial position, with cash and committed facilities available of £3.3 billion designed to maintain at least a 12-month liquidity horizon.
• Intercontinental Hotels - Keith Barr, Chief Executive Officer, said: "Demand for hotels is currently at the lowest levels we've ever seen.” Current trading IHG's Global RevPAR decreased 6% across January and February, with a broadly flat performance in the US offset by declines in Greater China, which saw an almost 90% decline in February. During March, given the measures adopted by governments around the world to restrict travel and social contact, we are anticipating Global RevPAR declines of around 60%, with steeper declines in those markets most impacted by restrictions. Cancellation activity for April and May, and current booking trends, indicate continued challenging conditions. In Greater China we now have 60 hotels closed compared to 178 at the peak, and in recent days have begun to see improvements in occupancy, albeit at low levels.
Cost actions - challenge all discretionary costs and reduce salary and incentives, including substantial decreases for Board and Executive Committee members. These measures will result in a reduction of up to $150m in our fee business costs. Similar actions, along with a reduction in marketing spend, are being taken across the System Fund in response to expected lower assessment fee receipts. We are also taking action in our owned, leased and managed lease hotels to contain costs. In addition, to support our owners and manage their cash flows, we have launched a comprehensive package of measures including delaying renovations and relaxing brand standards.
Cash Flow IHG remains conservatively leveraged. The staggered bond maturity profile, with the first maturity of £400m not due for repayment until 2022, provides long term funding. In addition, the company has access to a $1.4bn Revolving Credit Facility (RCF), which is currently $1.2bn undrawn, which together with free cash flow generation provides significant liquidity. The covenants on the RCF (detailed in Note 1) provide significant headroom for either EBITDA deterioration or an increase in net debt.
We are taking further steps to protect our cash flow, including reducing our gross capital expenditure by ~$100m from 2019 levels and managing working capital. In addition, the Board is withdrawing its recommendation of a final dividend of 85.9¢ (~$150m) announced on 18 February 2020 and will defer consideration of further dividends until visibility has improved.
• IPF – ‘Unless a customer requests otherwise, we have suspended our agent home service in Poland and have made arrangements for customers to pay remotely, and we are adapting our processes to achieve remote payment in our other home credit businesses.
In the first ten weeks of 2020, we traded in line with our expectations and there was no discernible impact of Covid-19 on credit issued, credit quality or collections. However….measures recently announced by multiple governments …together with our own actions on forbearance…, we expect our collections and credit issued to be adversely impacted during this period of uncertainty. It is too early to quantify the potential financial impact of these measures and we are focused on managing liquidity through restricting our lending criteria across all our markets.
The Group has a strong balance sheet with an equity to receivables capital ratio of 45% and headroom on undrawn debt facilities of £203 million at February 2020.
• Frasers – ‘Whilst it is too early to estimate what the full impact from Covid-19 the Board expects…significant disruption to its business, including reducing customer footfall. and therefore expects that Frasers Group will not achieve the range of guidance of 5 to 15% EBITDA growth (including House of Fraser but pre-IFRS 16 adjustments) previously given for the financial year ending 26 April 2020. Accordingly, and given the ongoing uncertainty, the Company is no longer giving formal guidance in relation to the financial year 2020.
• Investec – ‘The operating environment in the second half of the financial year (H2 2020) was difficult in both South Africa and the UK. The effects of Covid-19 on global markets are expected to negatively impact Investec's fourth-quarter operating performance.’
• Electra – As with most businesses the current trading position and valuation of the portfolio companies of Electra Private Equity PLC are being materially impacted by the countermeasures to the Covid-19 virus announced by the UK Government.
We have put in place a set of measures to manage each of our most impacted businesses and to navigate our way through these challenging times. With the cash balances held across the group, the ongoing support of banking partners and where appropriate, government support, we are confident that each of our businesses will survive and emerge strongly. Whilst we are continuing to develop plans for different eventualities, it is too early to determine any longer-term impact.
• TGI Fridays – Following the latest government advice to practice social distancing, we have made the decision to temporarily close all our restaurants from 9pm this evening. This will have an impact on a number of employees and we are working to retain and temporarily redeploy impacted employees to businesses operating in sectors currently experiencing exceptionally high levels of activity across the UK, with a view to them returning for relaunch. We are already working on our relaunch plans.
• Hotter Shoes – production has been temporarily suspended in our UK based factory however dispatches from our warehouse continue to service our UK and US direct to consumer businesses. The situation in respect of our UK retail estate is under ongoing review and it is likely that phased temporary closures will follow.
• Sentinel will be impacted by current events, its business model and winter seasonality reduce the immediate impact.
We welcome the Government's announcement that all retail, hospitality and leisure businesses will be given a 100% business rates holiday for the next 12 months. We will continue to monitor external events and manage the situation closely and will keep the market updated on developments as appropriate.
• ScS – In the past week, we have seen reduced footfall and we are mindful of the developing situation with Covid-19 and the potential impact on deliveries and demand. However, we believe the Group is as well positioned as it can be. In 2019, 29% of our furniture product came directly from China, and several of our other suppliers also source their raw materials from China. Following the Covid-19 outbreak, we have been working with our Chinese suppliers closely over the recent weeks to manage the impact on their factories of new Government regulation and restrictions. As China begins to adapt, lead times have increased, however, at this point we expect these lead times to return to normal before the year end.
Directors…have considered a severe but plausible downside involving a period of significantly reduced or nil revenue, due to the UK government's latest guidance to the public, which may erode the Group's current cash reserves. These conditions…indicate the existence of a material uncertainty, which may cast significant doubt about the Group's ability to continue as a going concern. The interim financial statements do not include any adjustments that would result if the Group was unable to continue as a going concern.
• JD Wetherspoon (note) – The week to 15 March, sales declined by 4.5%. The company believes it has sufficient liquidity to maintain operations at a substantially lower level of sales.
• Inspiration Healthcare – ‘The company continues to work proactively with the Dept of Health and Social Care in dealing with the Covid-19 situation in the UK. The company has now received further orders from UK National Health Service for the immediate supply of medical equipment and ventilators with a combined total value of over £4 and is working with suppliers from various countries to expedite delivery as soon as possible.’
• ISS (facility services) – ‘While organic growth in January was strong, we are now facing negative impacts relating to Covid-19, currently most notably within Food Services (15% of Group revenue in 2019) as well as within projects and above base work. Where this has occurred, we are adjusting our cost base accordingly. The outlook for 2020 is withdrawn at this time as the situation remains too uncertain to estimate.’
• ArcelorMittal – Given the extent of the outbreak, the health and safety implications, and particularly the impact it is having on several European countries in which ArcelorMittal operates, the Company is taking steps to reduce production from its European operations to ensure the wellbeing of our employees is maintained and that production is aligned with demand. We will continue to monitor the evolution of the coronavirus in each of our operating markets and take decisions accordingly to ensure the wellbeing of our employees and our ability to meet customer demand.
• Marks & Spencer (note) – trading over the next 9-12 months is likely to be severely impacted. As a result, it is not possible to provide meaningful guidance on future earnings.
• Carnival – ‘Carnival Corporation extends offer to governments and health authorities to consider cruise ships as temporary hospitals – The initiative would utilise converted cruise ships for non-Covid-19 patients to help relieve pressure on land-based hospitals and free up capacity to care for cases of Covid-19. Carnival announced yesterday that select cruise ships from the company's global cruise line brands, including Carnival Cruise Line, Holland America Line, Princess Cruises and P&O Cruises Australia, will be made available to communities for use as temporary hospitals to help address the escalating impacts of the Covid-19 pandemic on healthcare systems around the world. As part of the offer, interested parties will be asked to cover only the essential costs of the ship's operations while in port. ‘
• Coca-Cola – ‘As Covid-19 continues to spread and significantly impact various markets around the world, including the United States, the company has put preparedness plans in place at our facilities to ensure continued operations, while also taking all necessary steps to keep our teams healthy and safe. Our teams have conducted preparedness exercises of their business continuity plans. We are also working closely with our bottling partners on contingency planning for continuous supply and, at this stage, we do not foresee any near-term disruptions in concentrate or beverage base production. Since our last guidance update, local market policies and initiatives to reduce the transmission of Covid-19 have significantly increased. These initiatives include the direction to refrain from dining at restaurants, the cancellation of major sporting and entertainment events, material reduction in travel, the promotion of social distancing and the adoption of work-from-home policies. These initiatives, in combination with the latest movements in foreign exchange rates, will have a negative impact on our full year financial and operating results and, therefore, we do not expect to achieve our previously provided full year guidance. Due to the speed with which the Covid-19 situation is developing, there is uncertainty around its ultimate impact; therefore, the negative impact on our financial and operating results cannot be reasonably estimated at this time, but the impact could be material. We expect to provide an update during our Q1 2020 earnings release and call.’
• JC Penney – ‘Concerns are rapidly growing about the global outbreak of a novel strain of coronavirus (Covid-19). The virus has spread rapidly across the globe, including the U.S. The pandemic is having an unprecedented impact on the U.S. economy as federal, state and local governments react to this public health crisis, which has created significant uncertainties. These uncertainties include, but are not limited to, the potential adverse effect of the pandemic on the economy, our supply chain partners, our employees and customers, customer sentiment in general, and traffic within the malls and shopping centers containing our stores. As the pandemic continues to grow, consumer fear about becoming ill with the virus and recommendations and/or mandates from federal, state and local authorities to avoid large gatherings of people or self-quarantine may continue to increase, which has already affected, and may continue to affect, traffic to our stores. The Company has announced the closing of all stores through April 1, 2020 in response to the crisis. We are unable to predict when stores will reopen after this date or if additional periods of store closures will be needed or mandated. Continued impacts of the pandemic could materially adversely affect our near-term and long-term revenues, earnings, liquidity and cash flows, and may require significant actions in response, including but not limited to, employee furloughs, reduced store hours, store closings, expense reductions or discounting of pricing of our products, all in an effort to mitigate such impacts. The extent of the impact of the pandemic on our business and financial results will depend largely on future developments, including the duration of the spread of the outbreak within the U.S., the impact on capital and financial markets and the related impact on consumer confidence and spending, all of which are highly uncertain and cannot be predicted. This situation is changing rapidly, and additional impacts may arise that we are not aware of currently.’
• South Africana Airways – has suspended all intercontinental flights until May 31.
• Tiffany & co – outbreak has had a significant effect on the company’s sales results to date. The company has now temporarily close all its stores in the US and Canada. It has also closed most of its European and UK stores.
• Loungers# – has taken the decision to temporarily close all of its sites.
#corporate client of Peel Hunt
• The US has called off this year's G7 summit, which had been scheduled for June in Camp David.
• Farnborough Airshow has been cancelled.
• World Snooker Championship postponed.
• The Philippines has closed its borders to all non-residents. Foreign spouses and children of Filipino nationals are exempt, as are foreign government and international organisation officials and their dependents with previously issued visas. The suspension of visas will last until 12 April.
• The UK government has contacted 65,000 ex medical staff asking them to return to work.
• Sri Lanka has imposed a nationwide curfew from 18:00 pm local time (12:30 GMT) on Friday until 06:00am on Monday. The measure was announced a day after the election commissioner postponed parliamentary elections that were scheduled for next month.
• China has recorded a second day with no new local infections - that's cases transmitted within China.
• NASA, on Thursday ordered the shutdown of two rocket production facilities after one employee tested positive for Covid-19.
• Cirque du Soleil Entertainment Group has laid off almost all of its workforce except the support team. The Montreal-based circus company has had to cancel most of its shows worldwide.
• Saudi Arabia is suspending all domestic flights. Buses, taxis and trains are also being stopped for two weeks.
• India is restricting public transport. In Punjab, all public transport has been suspended with immediate effect. In the capital Delhi, the metro rail service in the capital Delhi will no longer stop at crowded stations, train frequency will be altered, and there will be random thermal scanning of passengers. Buses in major cities will no longer allow standing passengers, and the number of buses operating has been halved in most cities.
• Argentina has announced a national lockdown. All citizens are banned from leaving their homes except to buy food and medicines until the end of March.
• South Korea will require all arrivals from Europe to be tested for coronavirus from midnight on 22nd March.
• California's governor has issued a statewide "stay at home" order to all residents due to the pandemic. They can only leave their homes when necessary.
• The CMA has launched a taskforce to tackle negative impacts within its remit of the Covid-19 pandemic. For example businesses charging excessive prices or making misleading claims about their products.
• Finnish government has agreed to provide a €15bn package to support its economy.
• Austria is going to extend its restrictions until April 13.
• Jakarta has declared a state of emergency for 14 days.
• The UK's chief negotiator in post-Brexit trade talks, David Frost, is self-isolating after showing symptoms of coronavirus.
• Bavaria has ordered widespread restrictions on personal movement. As of Saturday, leaving the house will only be allowed with good reason, including going to work, shopping, visits to the doctor or pharmacy, supporting others or visiting partners. Outdoor sports and activity are still allowed, but only alone or with people from the same household.
• Saudi Arabia has placed restrictions on worship at Mecca’s Grand Mosque and the Prophet’s Mosque in Medina. Worshippers will no longer be allowed to pray in the overflow areas outside the mosques. Prayer services at all of the country’s other mosques have already been suspended.