Coronavirus - Just a mirage
24 April 2020
The first great hope for an antiviral treatment for Covid-19 (Remdesivir) has supposedly seen no clinical benefits in its first randomised clinical trial in China (according to the leaked WHO report). However, the company’s main trial (n=400) is due to report this month and the company has talked about a potential benefit, particularly for patients early in this disease. Markets have risen and declined on the back of the data, which demonstrates the desire and hopes for an effective treatment. Remdesivir may not be the silver bullet, but other promising candidates will likely appear in the coming months. Treating Covid-19 is likely to require a variety of approaches from testing to treating before a vaccine is available.
• 20,000 applications for virus testing on the UK government new website;
• South Africa to ease some lockdown restrictions;
• Czech Republic to reopen its borders;
• TFL furloughs 7000 staff;
• EU agrees €500bn aid package;
• Belgium has set out plans for leaving lockdown on the 4 May.
Buildings & Construction
• Persimmon – “The Government has issued clear guidance that it sees construction as a vital element of the UK economy and that where sites can comply with the Construction Leadership Council's Standard Operating Procedures, then they should continue to operate.
Persimmon is keen to support the Government in meeting this objective but the health, safety and wellbeing of the public and everyone who works on our sites and in our offices remains our top priority, and we will not recommence construction operations until we are satisfied that it is safe to do so. In the period since 25 March 2020, working closely with our colleagues, sub-contractors and suppliers, we have therefore developed and tested a range of new site protocols to enable work to recommence, while ensuring that the necessary social distancing restrictions are strictly enforced. These new measures are fully compliant with UK Government and Construction Leadership Council guidance.
The Group is therefore announcing today that it will begin a phased re-opening of its construction sites from the morning of Monday 27 April 2020 which will allow us to support our customers by completing the construction of the new homes they have purchased in a safe and responsible manner.”
Food, Drinks & Household
• Nestle – “The Covid-19 crisis is having an extraordinary and far-reaching impact on all our lives. Since the earliest stages of the pandemic, we have been working closely with local authorities and business partners to respond to the challenge. We have three key priorities: safeguarding the health and wellbeing of our people, ensuring business continuity to meet consumer needs and supporting communities all over the world with local relief efforts.
In these difficult times, many of our business partners are facing serious challenges, which create enormous uncertainty for their employees and families. We will continue to be a dependable business partner and make every possible effort to adapt to the evolving situation.
For our out-of-home and food service customers, who have been severely affected, we are offering prompt and pragmatic assistance to weather the crisis and help them restart their businesses. For example, under our "Always open for You" initiative, we are extending payment terms, suspending rental fees for coffee machines and offering free products. The total value of this initiative is expected to be around CHF 500 million.
Another example is our dairy supply chain. We are directly working with more than 200 000 dairy farmers globally. Dairy is highly perishable, and many farmers are now facing significant demand disruptions. We are fully meeting our commitments to buy agreed volumes in order to help sustain their livelihoods.
Since the beginning of this pandemic, we have engaged in numerous projects around the world as a reliable employer and business partner as well as a trusted neighbor and citizen in the 187 countries where we operate. Our commitment is certain and unwavering.
During the first quarter, our company remained resilient:
• Organic growth reached 4.3%, with real internal growth (RIG) of 4.7% and pricing of -0.4%. Growth was supported by strong momentum in the Americas and Zone EMENA. Zone AOA saw a sharp sales decline.
• Total reported sales decreased by 6.2% to CHF 20.8 billion (3M-2019: CHF 22.2 billion). Acquisitions net of divestitures reduced sales by 4.7%, foreign exchange reduced sales by 5.8%.
• Portfolio management is on track. The divestment of the U.S. ice cream business for USD 4 billion to Froneri was completed on January 31, 2020. The sale of a 60% stake in the Herta charcuterie (cold cuts and meat-based products) business to Casa Tarradellas is expected to close in the first half of 2020.
• Nestlé has decided to explore strategic options, including a potential sale, for its Yinlu peanut milk and canned rice porridge businesses in China.
Nestlé will retain and develop its existing Nescafé ready-to-drink coffee business.
• As it is still too early to assess the full impact of Covid -19, we maintain our original full-year 2020 guidance for the time being. We expect continued improvement in organic sales growth and underlying trading operating profit margin. Underlying earnings per share in constant currency and capital efficiency are expected to increase.”
• Amiad Water Systems – “As part of the company's efforts to reduce its expenses, the members of the Board of Directors have agreed to a voluntary reduction in their remuneration effective 1 April 2020 to at least 31 December 2020. The annual fixed fee and the per-meeting participation fees (in accordance with Israeli law) of all local non-executive directors are being reduced by 20%. The annual fixed fee and the per-meeting fees of the UK-based director is being reduced by approximately 60% and it will become the same as that of all local non-executive directors. This is alongside other measures the company is implementing to reduce costs, such as curtailing all travel and non-essential spend, to protect its robust financial position while the length and severity of the crisis remains unknown. The updated remuneration will also apply to Mr. Ishay Davidi upon his appointment to the Board, which is expected on completion of the FIMI investment in the company as previously announced.
As previously announced, the company is keeping the extent of potential disruption to trade caused by the Covid -19 outbreak under review. At present, production is continuing in each territory and the company is focused on ensuring it can deliver its products to customers, as far as circumstances allow. However, it remains too early to assess the impact that the disruption will have on revenue and profitability. The company will update the market in due course.”
• Senior – “The Health and Safety of our employees remains our highest priority. We are providing best practice guidelines to all of our businesses and are following national and local government instructions and guidance in the multiple jurisdictions in which we operate. We continue to pay special attention to those in our community who are most vulnerable and we are doing all that we can to support our employees during this unprecedented crisis.
Daily oversight of employee welfare and business continuity plans is being undertaken by senior executives, chaired by the Group Chief Executive Officer.
The actions taken have proved effective and have allowed all of our operations to remain open, other than a small number where national governments have mandated a total shutdown.
Coronavirus (Covid -19) is causing significant disruptions to our end markets and their respective supply chains, with customer demand falling as activity levels have reduced. As a consequence, it has been necessary to furlough significant numbers of employees in those businesses most affected by the downturn. Where government assistance is not available to financially support furloughs, for example in South Africa, we have ensured that we continue to pay our employees.
At the same time, the Executive Directors, the Chairman and the Non-Executive Directors are reducing their salaries and fees by 20% for a three-month period and the situation will be reviewed at the end of that period. The other members of the Executive Committee and senior leaders throughout the business are also taking a reduction in their salaries.
Until the extent and duration of the disruption is better understood, the Group continues to focus on taking actions to conserve cash to manage through the crisis, including curtailing capital expenditure, tightly managing working capital and implementing further cost cutting actions. Around 17% of the Group's employees are currently on furlough and the restructuring activities, which commenced last year, are further adapting to the changing end market conditions.
Financial facilities – At 31 December 2019 our committed borrowing facilities were £305m with an average maturity of 4.4 years and the Group had headroom of £159m under these committed facilities. Net Debt was £230m, including £84m of capitalised leases following the adoption of IFRS 16 which do not form part of the definition of debt under the committed facilities and do not impact the Group's lending covenants. We have two covenants for our committed borrowing facilities which are tested at June and December: our net debt to EBITDA must not exceed 3.0x and our interest cover must be higher than 3.5x.
The Group has very supportive lenders, both banks and US private placement investors. With our UK and US banks, we have agreed covenant relaxations in relation to the June and December 2020 testing periods to provide flexibility should this be needed. We are concluding discussions with our four US private placement investors to agree covenant relaxations.
We have undertaken extensive scenario testing for 2020, based on a variety of end market assumptions, while taking account of appropriate cost reduction and cash preservation mitigating actions. Against this set of assumptions, our assessment shows that the Group has sufficient liquidity under its existing committed facilities without utilising other funding sources that would be available to it.”
• Dart Group – “Further to the Trading Update issued on 18 March 2020, the Board expects to report pre-exceptional Group profit before foreign exchange revaluation and taxation for the financial year ended 31 March 2020 of between £265m – £270m, an increase of approximately 49% on the prior year.
Exceptional items – Although Jet2.com and Jet2holidays are currently on sale from 17 June 2020 in readiness for when our holiday flights can resume, due to operations currently being suspended for an indeterminate period of time, the Board estimates that the Group will record a net exceptional charge of approximately £109m relating to ineffectiveness on a proportion of FY21 fuel and foreign currency hedges in the FY20 results.
We continue to actively monitor the financial health of our hotel counterparts in respect of our advance deposits and their potential for recovery. Contractually the majority of these deposits are able to be reallocated to future seasons' bookings.
Despite the fact that Jet2.com had to suspend its flying programme in mid-March due to the unprecedented travel restrictions imposed by governments across Europe as a result of the spread of the Covid-19 virus, in FY20 our Leisure Travel business still achieved overall flown passenger growth of 14% to 14.6m and growth in Package Holiday customers of 19% to 3.8m, representing 52% of the overall mix of passengers flown, an increase of 3ppts.
Year ending 31 March 2021 (FY21) – The impact and duration of Covid-19 remains difficult to determine, and the Board has no clarity as to how this will affect Group profit before foreign exchange revaluation and taxation for the financial year ending 31 March 2021.
In response, we have already taken many actions to underpin the stability of our business and preserve cash. With our aircraft fleet currently grounded, approximately 80% of our UK colleagues have been put on temporary leave of absence ('furloughed') in order to make full use of the grants available under the UK Government's Coronavirus Job Retention Scheme (the "Scheme"). Similar schemes are also currently in place for many of our overseas colleagues.
From 17 June 2020, we are on sale with a reduced flying programme and as a consequence have cancelled all 12 summer-only third-party leased aircraft. In addition, non-critical capital expenditure has been deferred, recruitment and discretionary spending has been frozen, and contractors have been terminated. Furthermore, we have also had positive discussions with many of our suppliers to reduce our monthly outgoings.
Despite the Scheme, our monthly salary bill remains a substantial proportion of our overall costs and therefore, with huge reluctance and after much thought, we have asked all colleagues (including Directors) to take a pay cut of up to 30% for the 6-month period from 1 April 2020 until 30 September 2020. Additionally, performance related bonuses earned for the financial year ended 31 March 2020 plus the Discretionary Colleague Profit Share Scheme, will not be paid. Finally, the Board deems it inappropriate to recommend a final dividend for the year ended 31 March 2020 while making use of the Scheme.
We have prudently fully drawn down our Revolving Credit Facility of £100m and have also begun the process to confirm our eligibility and access to the Covid Corporate Financing Facility, launched by the Bank of England. In addition, we remain in ongoing constructive discussions with our existing liquidity providers, who recognise the strength of our business model.
Positively, and despite the considerable uncertainty, we are seeing customers still making bookings for late summer 20 and winter 20/21, with encouraging numbers choosing to rebook rather than cancel. In addition, and though very early, summer 21 bookings to date are very promising.
Our Distribution & Logistics business, Fowler Welch, continues to perform strongly, providing much needed and valuable distribution services to the UK food industry supply chain.”
• Pearson – “Covid -19 update
In March we provided a financial trading update on the potential impact of the pandemic on our global businesses. First quarter results are consistent with this.
If social distancing extends significantly, the effect on our North American and International courseware businesses may be more pronounced as campuses and schools remain closed for longer.
We have identified actions to reduce discretionary spend to partially mitigate the potential impact, while ensuring that Pearson is still well placed to benefit as the macroeconomic landscape recovers.
We have chosen not to furlough staff and are instead re-deploying people as much as we possibly can around the business to support the areas of greatest need and opportunity.
The Chief Executive and Chief Financial Officer are taking a temporary voluntary reduction in their remuneration of 25% and 20% respectively, and the Chair and Non-Executive Directors are also taking a voluntary reduction in fees of 50% and 25% respectively. This will be donated to charities engaged in Covid -19 related activities.
Pearson has continued to make an array of digital learning tools, services and resources available to students, educators and parents affected by school, college and university closures.
Today we announce the upcoming launch of 'UK Learns' – an online portal which contains free, digital, skills-based courses to help re-skill and broaden employability prospects for employees who have been impacted by Covid-19.”
• SpaceandPeople – “Since the previous update on 31 March 2019, the Group's two main geographical markets of the United Kingdom and Germany have both continued to be severely affected by the ongoing Covid-19 pandemic and the decisions of the governments in both countries to close shopping centres and enforce social distancing as part of the efforts to tackle it.
As previously reported, all of the Group's premises in the UK, Germany and India remain closed and the majority of staff in the UK and Germany have been furloughed in accordance with the schemes in place in each country. The remaining staff continue to work from home in order to keep the business functioning.
During this period, management have been consulting with both our retail and property clients and have developed a number of products and initiatives. These will assist in both filling vacant retail units with pop up retailers and creating enlivenment activity in vacant space. This will position us at the forefront of the recovery of venue vibrancy as soon as restrictions are eased. These proposals have been well received and a number of projects are being actively considered at this time. The directors are pleased to announce that the Group's application for an additional £1million of lending from our principal banker through the UK government CBIL scheme has received credit approval and is progressing through legal documentation and they are optimistic that this will be completed soon.
When this additional lending has been received, the Board will have greater certainty about the future trading of the business. Accordingly, the decision has been taken to further postpone the announcement of the preliminary 2019 results. An update on the proposed announcement date for the preliminary results will be made in due course.”
• Gem Diamonds – “Announces that, notwithstanding the general lockdown in Lesotho having been extended until 5 May 2020, the Government of Lesotho has permitted the re-opening of diamond mines in Lesotho, previously subjected to a lockdown order, subject to compliance with Covid-19 health and safety guidelines.
Accordingly, the company's Letšeng mine will re-open on Monday, 27 April 2020, in accordance with a phased ramp-up plan which is compliant with health and safety protocols formulated by health experts for the prevention of Covid-19 disease. This plan also reflects the practical supply chain and market considerations arising from the continued lockdown in Lesotho, South Africa, Belgium and other relevant jurisdictions.”
• Burberry – “Given the rapidly evolving situation surrounding the Covid -19 pandemic, we wanted to provide an update on the steps we are taking to support our employees, our customers and our communities.
Over the past three months, we have put in place measures to help prevent the spread of the virus and ensure employee safety and wellbeing, including temporarily closing retail stores and implementing strict social distancing protocols. We have also looked beyond Burberry, dedicating resources to supporting those in need and preventing further infection. This includes turning over our trench coat factory in Castleford, UK to manufacture personal protection equipment (PPE) for medical and care workers.
While we continue to look hard at our cost base, reducing spend on non-essential areas, we have decided to take the following additional steps to support our priorities over the next few months:
• We will continue to maintain base pay for all employees who are unable to fulfil their roles because of store or site closures.
• We will not rely on government support for jobs in the UK where more than a third of our employees are based.
• Our senior leaders will take a voluntary 20% pay cut from April through June.
• The Board of Directors has agreed to a voluntary 20% reduction in their base salary and fees from April through June, with the equivalent cash amount to be donated to the Burberry Foundation Covid -19 Community Fund. The fund, which was established earlier this month for our employees to support communities in need globally, is additional to the financial donations Burberry has made to vaccine research and charities alleviating food poverty, with monies going towards procuring and distributing PPE, helping foodbanks and supporting healthcare charities around the world.
Our trench coat factory in Castleford is now manufacturing non-surgical gowns and supplying them to the UK National Health Service. We are also sourcing surgical masks through our supply chain and supplying them to the NHS and charities such as Marie Curie, which provides nursing care for families living with terminal illness in the UK. To date, we have donated more than 100,000 pieces of PPE.”
• Fraser Group – “Frasers Group has taken the commercial decision to settle these matters now given the uncertainty is affecting Frasers Group's banking lines and its suppliers' credit insurance where, due to store closures as a result of the current Covid-19 crisis, Frasers Group understands the majority of new credit insurance cover has been withdrawn for the time being. Frasers Group would also note that it has currently not been accepted as eligible for the Covid Corporate Financing Facility (CCFF).”
• Lookers# – “In the two-month period ended 29 February 2020 ("the Period"), prior to the impact of Covid-19, the Group recorded a like-for-like decline in new vehicle unit sales versus last year of -4.8% compared to a UK new car market which declined by -5.8%. In the Period like-for-like unit sales of used vehicles declined by -2.6% whilst like-for-like aftersales revenue was up by 0.9%.
In addition to the vehicle sales volume decline the Group also suffered margin pressure primarily driven by a management decision to reduce its holding of aged used and demonstrator inventory.
This was partly offset by a reduction in operating costs, following a series of management actions implemented in November 2019, including a headcount and recruitment freeze. Headcount is currently 6% below the level at the commencement of the initiative. As a result of this and other actions, like-for-like operating costs in the Period were marginally below last year's levels.
Operations – On 23 March 2020, in order to protect the safety and welfare of our people and customers and in response to UK Government social distancing advice, the Board took the decision to temporarily close all its trading locations. Following the introduction of new operating measures, the Group has subsequently partly reopened 31 locations which are providing essential repairs and maintenance to key workers' vehicles and 10 parts distribution centres. The Board would like to thank our colleagues who have volunteered to deliver these essential services.
Financial Position – The Board is continuing to take a prudent and decisive approach to managing cash and would like to thank all stakeholders for their ongoing support during this period.
We welcome the measures announced by the UK Government to support businesses through this unprecedented disruption. We have furloughed approximately 7,000 colleagues. All members of the Board and senior management have agreed to temporary reductions of up to 30% to their contractual remuneration.
As reported in the Group's year end trading update the Board expects to report net debt at 31 December 2019 of approx. £62.0m (2018: £86.9m). Net debt on a cleared funds basis as at the date of this announcement is approximately £65m.The Group's £250m revolving credit facility with five banks expires in March 2022.”
• Bilby – “The Group anticipates announcing its results for the year-end 31 March 2020 in July 2020. It is pleased to report that results are expected to be in line with previous guidance of at least maintaining revenues of £59 million with an underlying EBITDA of not less than £4.5 million, and with a net debt position at the year-end of £7.4 million (2019: £10.9 million).
Supporting our employees and customers – Bilby's core services provide its local authority and housing association customers with vital services including emergency repair and maintenance cover, whilst also ensuring that customers remain compliant with gas, electricity and building maintenance regulations. As a result, the Government recognises many of our employees as key workers and it is deemed crucial that they continue to perform their essential services. In addition to the critical and necessary work that our employees continue to undertake, they are also providing vital voluntary services to our customers, assisting and supporting the wider community during these unprecedented times.
The outbreak of Covid -19, as with many businesses, has presented challenges for Bilby and how it operates, but our absolute priority will always be the safety of our employees and customers. We have implemented a range of measures to ensure the well-being of colleagues while minimising the risk of spreading the virus and we remain focused on serving our customers in a wholly safe manner.
Given the nature of Government restrictions imposed as a result of Covid -19, the Group is experiencing delays in accessing certain residential and communal properties to undertake work. Furthermore, while the UK remains subject to travel and social distancing restrictions, some local authority customers are choosing to defer certain elements of work that are deemed of a lower priority. However, over 95% of Group revenue is generated through contracts with local authorities and housing associations, providing an assurance of continuity moving forward as well as minimal debtor risk. Whilst the short-term outlook remains uncertain, the Group is confident of completing these deferred works when conditions return to normal and our longer-term prospects remain very positive.
Mitigating Actions – The positive momentum during the second half of the year has demonstrated the underlying cash generation abilities of the Group and has served to significantly increase headroom against our facilities at the year end. In light of the current challenging environment, the company is maintaining a rigorous focus on cash conservation and cost management. This process has been helped as a result of the company's recent investment in enhanced reporting controls and aligning accounting and performance management procedures. To further reduce the Group's exposure to Covid-19, we have put in place a range of initiatives including work from home, alternate shift patterns and implementing the Government's measures relating to workforce protection through the furlough scheme as well as taking advantage of VAT and NI/PAYE deferment. The Board and senior management have also taken a 40% reduction in salary and remuneration to provide further support to the Group's cost management objectives.
Balance sheet update – In the year to 31 March 2020, and as part of the strategic review, the business took significant steps to strengthen its balance sheet including raising £2 million of new equity. In addition, the Group focused on reducing the stretch in its trade creditors. Collectively this led to net debt dropping by 32% from the year ending March 2019 position of £10.9 million to £7.4 million at the period end March 2020, compared to overall facilities of £10.4 million. In November 2019, the company received approval from its banking partner HSBC to make amendments to its financial covenants up to June 2020, which provided additional time and flexibility for the Group to enter into new debt facilities with rebased financial covenants. These discussions have progressed well. At the year-end, the company maintained comfortable covenant headroom on its banking facilities. However, in light of the current Covid -19 lockdown, the Board felt it prudent to review future trading scenarios and their impact on covenants with HSBC, to ensure that the new agreement reflects the interim disruption that Covid -19 will have on the business and its outlook. HSBC remains supportive and the Group will update the market once a new agreement has been confirmed. A new agreement is expected to provide Bilby with sufficient liquidity and financial stability both during and after the Covid-19 outbreak.”
#corporate client of Peel Hunt
To read the full research note, please click here.