Coronavirus - The bigger picture
30 June 2020
Officials in Tokyo today announced it is to move away from numerical targets in containing Covid-19, and rely more on advice from a committee of experts. From the early stages of the disease Japan has been less concerned with statistics and more focused on its response. This approach has sometimes been criticised; however, so far the country has been highly successful in keeping the outbreak under control. It still has less than a 1,000 deaths. While data is vital, context and understanding the numbers is far more important.
• UK economy shrank 2.2% between January and March.
• China stops majority of pork imports from the Netherlands.
• Stay at home orders in Victoria, Australia.
• US not on EU’s safe travel list.
• French consumer spending up 37% in May month-on-month.
Buildings & Construction
• Henry Boot# – “Henry Boot remains in a good position following our Annual Results announcement on 20 May. While Covid-19 continues to affect the Group, we have seen an increase in activity and output throughout all our operations and the Group has continued to make strategic progress. We have now resumed activity on all our sites and depot sale centres are open. On the back of a robust 2019, we have strong liquidity with a net cash position of £45m as at 29 June, allowing us to focus on the long-term opportunities that have proved to be so successful for the Group for many years.
Our priority is to continue delivering a high-quality service to the customers and the communities that we operate in. During the pandemic, we engaged with subcontractors and suppliers to ensure their interaction with our operations was done in a safe and effective manner. It also has been positive to see our employees respond well to new working practises and during the pandemic we have learnt new efficiencies that will evolve the Groups operations for the future.
Hallam Land Management are active in the land market and are making progress on a number of sites. Our team, and most planning authorities with whom we engage, have adapted to working remotely and continue to progress planning matters. This has been shown at Didcot, where Homes England & Oxfordshire County Council have signed a Homes and Infrastructure Funding Agreement, bringing the disposal of this site a step closer.
There are discussions ongoing with house builders on several other site disposals, and encouragingly we have received bids at pre lockdown values. The new homes market has emerged in resilient fashion, but it is still very early days and there is a need to remain cautious. We anticipate a delay in disposals, with sales moving into 2021.
HBD has resumed work on all its live sites. We remain committed to a GDV of £315m over nine schemes, which are all pre-sold, pre-let or under offer, but have experienced unavoidable delays on these development sites. In particular, a delay to our largest scheme Kampus in Manchester has moved the completion of construction works from H2 2020 to early 2021. We are also on four sites carrying out infrastructure works to prepare them for future development.
Work commenced on site at Markham Vale on 15 June 2020 to construct a further 297,000 sq ft of industrial and logistic space. The scheme has been pre-sold to Aver and comprises two units of 221,518 sq ft and 75,000 sq ft and is due for completion in March 2021. We also received planning consent on two industrial developments, Preston EAST, which is a speculative scheme of 69,372 sq ft and IAMP One Phase 2 which adds c.15 net developable acres to the scheme and allows us to deliver a c.1m sq. ft building on a single plot.
As of 21 June, all Stonebridge Homes sites are open including the sales centres. 55 reservations have been secured to date, 16 in lockdown and within budgeted sale pricing. We are experiencing encouraging levels of interest across all developments but as mentioned, we remain cautious.
There has been a steady improvement in productivity on construction sites since our last update and we are now achieving 85% of planned activity. Whilst an assessment on the new proposed one metre social distancing rule is ongoing, we are hopeful that this recent adjustment can further increase the activity levels throughout July. Our construction business is well placed to deal with the uncertainties through our bias to public sector work.
With the reopening of Banner Plant's depots and sale centres there has been an increase in their output, with recent weekly sales at 80% of those achieved last year. Lastly, Road Link (A69) has only seen marginal effects and continues to perform in line with expectations.
We will continue dealing with the disruption Covid-19 has caused and the material impact this will have but the business has been encouraged by the increase in recent activity and output. As a result, we are bringing a significant number of employees off furlough. These are still early days, but we believe this can be built upon and we have secure opportunities in key markets we believe to be sustainable: residential, industrial and logistics, and urban development.”
Inland Homes – “Some evidence of a recovery is becoming apparent. The Group is in discussions with various parties regarding a number of land disposals. We were delighted to announce recently the first of these with the sale of 94 plots at Wilton Park in Beaconsfield which was both at a premium to the EPRA valuation and at a higher value than was being achieved in March. I look forward for the Group to report further transactions, as they are achieved, over the next few months.
During the twelve-week period from 1 April 2020, the Group achieved 52 gross reservations and 6 cancellations resulting in 46 net reservations from five active outlets, including a block sale of 24 units from one site. Our current forward sales of homes reserved and exchanged amounts to £21.2m. In addition, we have forward sold a hotel under construction at our development in Bournemouth for £13.3m, which is expected to complete in early 2021.The Group is also being approached by housing associations and build to rent funds for bulk purchases of apartments under construction.
The Group's focus is to increase its partnership construction activity and the current partnership housing order book amounts to £84.9m. It is also in discussions with certain parties for further partnership housing opportunities.”
• Redrow# – “The timing of site closures due to Covid-19 towards the end of March had a profound impact upon the Group's results in a year which was budgeted to be disproportionately weighted to the end of the second-half. Adapting to new ways of working also limited the number of homes that were completed in the last few weeks of the financial year after construction activities were able to resume.
The Group completed 4,032 homes in the year to the end of June compared to 6,443 in the previous year. Turnover is expected to be £1.34bn against £2.11bn last year.
The Group secured 4,222 private reservations in the year with a value of £1.61bn (2019: £1.67bn). In the 5 weeks since re-opening its sales offices, the Group has achieved a net sales rate per outlet per week of 0.56 (2019: 0.59) reflecting strong pent-up demand, especially from buyers using the Government's Help to Buy scheme.
As a result of the Group's strong sales performance earlier in the year, and the significant shortfall in legal completions due to the Covid-19 lockdown, the Group enters the new financial year with a record order book of £1.42bn (2019: £1.02bn) of which c70% in terms of revenue is contracted.
Funding – The Group ended the financial year with £126m of debt (2019: £124m cash). At the beginning of the pandemic the Group increased its Revolving Credit Facility to £350m and, as a precaution against the risk of an extended lockdown, obtained eligibility under the Government's CCFF. Due to a timely return to work and the effectiveness of measures taken to protect its cash flow, the Group is unlikely to draw on the CCFF. Recent studies have highlighted that the Covid-19 pandemic has shifted home movers' priorities. In particular, there is a desire for more inside and outside space, wanting to live closer to green spaces and having better home workspace. Redrow's reputation for placemaking and its award winning Heritage product ideally position the business to meet these changing customer priorities.
Following a review of our divisional businesses, we have decided to scale-back our operations in London to focus on the Colindale Gardens development and continue to target the Group's future growth on the higher returning regional businesses and the Heritage product. The costs and related significant impairments associated with scaling-back the London business will be provided for in the June 2020 accounts. As a consequence of the impact of Covid-19 and making these provisions the profit for 2020 will be substantially below 2019.
The prospects for the wider economy and its impact upon the new homes market remains uncertain. Despite this, as lockdown restrictions have eased, trading has been encouraging, driven by high customer demand for Help to Buy as more buyers look for support as the mortgage market and economy recovers. To ensure the recovery is sustainable, and buyers intending to use the scheme have the opportunity to do so, we urge the Government to approve an extension to the existing scheme beyond March next year or change the scope of the new scheme to provide access to a broader range of buyers.”
• Walker Greenbank – “Covid-19 has significantly impacted the start of the Company's current financial year. Whilst our factories were temporarily closed, our warehouses in Milton Keynes and New Jersey have remained open and we have continued to fulfil customer orders throughout the year to date. With the phased reopening of our factories, and lockdowns being progressively released in our target markets, there are signs of further improvement in trade, albeit at a level below last year.
In the first five months of our financial year, product sales have been approximately 35% below the same time last year. Online and international product sales channels have performed better than our UK average. Product sales in the past four weeks have been approximately 31% below the same time last year but ahead of management expectations. This reflects a steadily improving trend since the start of April.
The Company will provide a further update on its trading performance at the Annual General Meeting, which is expected to take place on 29 July 2020. Given the uncertainty generated by the Covid-19 pandemic and the longer lasting economic consequences, we are not in a position at this stage to provide specific guidance for the financial year ending 31 January 2021.”
• Manx Financial – “The Group's response to Covid-19 was carefully considered and professionally executed with the wellbeing of our staff, their families, and our customers being our principal concern. We deployed our working from home strategy, which has allowed the business to continue to function seamlessly for all of our customers for the last ten weeks. As I write, the Isle of Man has had no further cases for thirty seven consecutive days with life returning to much as normal, but with our borders shut. The Bank, in conjunction with the Island's principal clearing banks, has worked very successfully with the Isle of Man Treasury in the provision of disruption loans to those businesses facing financial challenges. These loans are at advantageous terms and are 80% Government backed.
Unfortunately, the situation in the UK, whilst clearly improving, is still somewhat concerning. Conister Finance & Leasing, a subsidiary of the Bank, is working with its clients to obtain the relevant UK Government's business support packages.
Trading for the initial three months of the year was strong in all areas, but as the year progressed, a number of our loan customers have found difficulty in meeting their initial terms. As a result, we are now in continual dialogue with these customers to help them through any unforeseen economic shock. However, the Bank's response has not been confined to forbearance and renegotiation, but has extended to respecting the commitments made to our customers and remaining open for new business. Whilst we have continued with our conservative approach to provisioning, I am pleased to note that recently our clients' circumstances appear to be improving, especially in the Isle of Man where new business acquisition continues apace.
Almost all commentators predict a forthcoming recession in the UK, with the impact of Covid-19 together with Brexit making any realistic assessment almost impossible. Our current view is that it will take some time before the economy becomes stable and, as a result, we anticipate that it will be well into the first half of 2021 before confidence returns.
The earlier slowdown in new advances will, in turn, lead to a reduction in our income interest. The acceptance of forbearance requests will also affect the income statement. As a result, we anticipate that our net loan book will reduce. Factoring this into our planning, we have built up our liquidity to the highest level that we are able, ensuring that we are well placed to take advantage of all lending opportunities. Additionally, any reduction in our net loan book will further improve our regulatory capital ratios.
In short, the financial impact of the virus on the full year's figures is still too uncertain to provide any reliable guidance but our strong cash reserves and diverse income streams will prove valuable assets in the forthcoming months.”
• Rotork – “Since our trading update on 31 March the near-term outlook has become a little clearer, but there remains considerable uncertainty, including potential further Covid-19 impacts.
All our production facilities are currently open, albeit in a small number of cases operating at below normal output levels, with reconfigured layouts and processes and equipment to allow safe distancing between our employees. Whilst we are planning to keep our facilities open, we will not hesitate to close them again if required or if we believe there is any risk to our colleagues or their families.
Due to the unprecedented level of uncertainty, on 31 March we withdrew our forward guidance for the current year. Whilst the near-term outlook has become a little clearer, there remains considerable uncertainty, hence we retain this position. We are confident however that we will successfully navigate the current challenges and will be a stronger business going forward. Our confidence comes in no small part from the success to date of our Growth Acceleration Programme initiatives which have already demonstrably increased Rotork's cyclical resilience.”
• Smith Group – “The resilient overall performance of the last four months reflects the momentum of the first half and our strong order books at the outset of the Covid-19 crisis. There has been some slowing, due to the impact on our operations and those of our customers; we also face increasingly tough comparators through the end of the fiscal year. We are currently operating in all our 75 manufacturing plants, but are not immune to higher consequential costs.”
• Cineworld – “In line with recent adjustments to the schedule of upcoming movie releases, Cineworld announces today that its cinemas in the US and the UK will reopen starting Friday 31st July. Cineworld has and will continue to reopen cinemas in its other markets as previously stated on 16 June 2020, however upcoming reopenings remain subject to final clarifications and confirmation in relation to various government Covid-19 restrictions.
Cineworld will implement its previously announced health and safety measures, which adhere to the latest public health guidelines and include contactless payments, innovative sanitization procedures, new social distancing protocols and seating capacity limits in line with local regulations.
Cineworld will continue to monitor the situation closely and follow any changes to regulations or guidance from public health officials.”
• Cirque du Soleil – “As a necessary part of its restructuring and eventual plans to restart operations, Cirque du Soleil announced critical steps related to employees, including the termination of employment of approximately 3,480 employees previously furloughed in March following the halt in revenue caused by the government-mandated shutdowns in response to the COVID-19 pandemic.
• This termination allows employees to maximize and accelerate the financial compensation that they can obtain by immediately receiving payment on account of all accrued vacation time and gaining access to the Canadian federal Wage Earners Protection Program and other unemployment assistance programs. The Sponsors’ bid and related restart plan includes a number of considerations for employees, including the creation of $15 million in assistance funds for those whose employment has been terminated and the intent to rehire a substantial majority of terminated employees, business conditions allowing, once and as mandatory shutdowns are lifted and operations can resume.
• Given resident shows in Las Vegas and Orlando are expected to resume before the rest of the Company’s shows, the artists and show staff of the Resident Shows Division are not affected by this measure to allow for a swift and efficient return as soon as the ban on gatherings is lifted and show operations can resume.”
• InterContinental Hotels – “The pace of hotels reopening has continued to accelerate through the second quarter, with only 10% of the global estate currently still closed. In the Americas region, around 5% are closed; these are predominantly managed luxury and upscale hotels, and those outside of the US. Good progress has been made across the EMEAA region as government-mandated hotel closures have eased; around 30% currently remain closed. In Greater China, just 1% are closed.
RevPAR performance – We expect to report a comparable RevPAR decline of ~(75)% for Q2 (resulting in ~(52)% for H1), including (82)% in April, (76)% in May and an estimated (70)% for June. The small but steady improvements in RevPAR through the second quarter are mostly attributed to the Americas franchised estate and the Greater China region. Occupancy levels in comparable open hotels have improved to over 40% in the US.
The Q2 RevPAR decline for the Americas region is estimated at (72)%. The US franchised estate, which benefits from a weighting towards domestic demand-driven mainstream hotels, with a lower reliance on large group business and higher distribution in non-urban markets, is estimated to have declined ~(67)% in Q2. This compares to an estimated ~(87)% decline in Q2 for the US managed estate, which is weighted to luxury and upper upscale hotels in urban markets that individually contribute higher fee revenue than a mainstream franchised hotel.”
• On the Beach# – “During April OTB Group bookings were at c.10% of normal volumes as consumer appetite for booking holidays remained subdued.
From mid-June there has been a significant increase in demand for summer 2020 departures, albeit from a very low base.
Booking volumes for summer 2021 remain low, but are significantly ahead of the prior year, partially due to the early release of flights for next year by most major airlines.
Most airlines are seeking to resume flying, albeit at a significantly reduced level, in July 2020, in line with the partial reopening of resorts for overseas visitors. Whilst a significant number of bookings have been or will be cancelled, we do expect that some holidays booked to travel from 1 July to 31 October will go ahead as planned.
The Board believes the business is well-positioned to grow market share as demand for holidays recovers. Whilst this recovery is likely to take some time and the consumer environment will continue to be challenging, the Group remains confident in the resilience and flexibility of our business model and believe there is an exciting opportunity to increase our market share over the short to medium term.
The Board will continue to evaluate internal and external opportunities that will both increase scale and deliver value for shareholders.
In light of the continued market uncertainties, the Group is maintaining its suspension of full year guidance until such time that the overall impact of Covid-19 on the Group becomes clearer.”
• Royal Dutch Shell – “In the second quarter 2020, Shell has revised its mid and long-term price and refining margin outlook reflecting the expected effects of the Covid-19 pandemic and related macroeconomic as well as energy market demand and supply fundamentals. This has resulted in the review of a significant portion of Shell’s Upstream, Integrated Gas and Refining tangible and intangible assets.
The Refining asset valuation updates reflect Shell’s strategy to reshape and focus its refining portfolio to support the decarbonisation of its energy product mix, leveraging assets and value chains in key markets. The Upstream and Integrated Gas asset valuation updates, including of related exploration and evaluation assets, are largely driven by the change in long-term prices with some impacts due to a changed view on the development attractiveness. A revision in the decommissioning and restoration provision discount rate assumption from 3% to 1.75%, reflecting a lower interest rate environment, has affected the asset values tested for impairment.
The following price and margin outlook have been assumed for impairment testing:
• Brent: $35/bbl (2020), $40/bbl (2021), $50/bbl (2022), $60/bbl (2023) and long-term $60 (real terms 2020)
• Henry Hub: $1.75/MMBtu (2020), $2.5/MMBtu (2021 and 2022), 2.75/MMBtu (2023) and long-term $3.0/MMBtu (real terms 2020)
• Average long-term refining margins revised downwards by around 30% from previous midcycle downstream assumption
Based on these reviews, aggregate post-tax impairment charges in the range of $15 to $22 billion are expected in the second quarter. Impairment charges are reported as identified items and no cash impact is expected in the second quarter. Indicative breakdown per segment is as follows:
• Integrated Gas $8 – $9 billion, primarily in Australia including partial impairment of QGC and Prelude
• Upstream $4 – $6 billion, largely in Brazil and North America Shales
• Oil Products $3 – $7 billion across the refining portfolio
These impairments are expected to have a pre-tax impact in the range of $20 to $27 billion. No impairment charge on Goodwill is expected to be recorded in the second quarter
Impairment calculations are being progressed: the range and timing of the recognition of impairments in the second quarter are uncertain and assessments are currently ongoing
The revised outlook for commodity prices and refining margins could impact overall deferred tax positions, which will be reviewed after the finalisation of the operating plan later in 2020.”
• Staffline – “The impact of Covid-19 has been mixed across the Group with surges of demand reported in key food distribution and production supply chains, offset by declines in demand from sectors where the Government's shutdown was most severe such as manufacturing, retail and classroom-based training programmes
The Recruitment divisions have experienced significant variance between customer sectors
• Strong response to the unprecedented surge in food sector demand utilising web-based platforms to connect displaced workers with vital roles required in the food supply chain, where demand continues to be strong
• Conversely, demand from other sectors such as retail, automotive and manufacturing diminished considerably
• Since the easing of lockdown, the Group has benefitted from a gradual recovery in demand for labour in non-food sectors including retail and manufacturing in line with our expectations
PeoplePlus has continued to operate the majority of its services adhering to isolation measures
• Most funding support provided has been on a cost only basis
• Whilst business intake in 2020 has weakened, it is anticipated that the Government will launch new funding for training and retraining schemes, which PeoplePlus is well-positioned to benefit from The Board remains cautiously optimistic that each of the three operating divisions will achieve a positive result in 2020 on an underlying operating profit basis.”
• GB Group# – “Given the global impact of Covid-19, we have been encouraged by some countercyclical opportunities. These have, to a certain extent, helped soften the impact of reduced underlying activity in some parts of our business in the first quarter of FY21 trading. Although it is still early in the pandemic, customer churn and levels of insolvency are at normal levels although we have started to see some customers taking more time to settle their invoices. There has been little impact on our suppliers. We have continued to win new business, although sales cycles are, understandably, lengthening.
It is not possible to predict how long the effects of the disruption caused by the pandemic will last. While the Group has a high level of annual recurring licence revenue, which provides good visibility, the full impact on volume-based sales are harder to predict. This means we do not yet have sufficient visibility to provide guidance for the year ending 31 March 2021.”
• The UK's first full local lockdown has been announced in Leicester, with stricter measures imposed in the city. Non-essential shops have shut, and schools will close for most pupils on Thursday and the loosening of restrictions for pubs and restaurants on Saturday will also not be taking place there.
• UK economy shrank more than first thought between January and March, contracting 2.2% according to the ONS.
• South Korea has concluded that the idea of a community forming herd immunity from Covid-19 is “wishful thinking”. The Deputy Director of the Korean Centre for Disease Control (KCDC), Kwon Jun-wook, said the organisation had come to that conclusion after analysing both domestic and international data.
• Beaches in Los Angeles County will be closed over the US Independence Day weekend in an effort to prevent crowding, local authorities have said. All public beaches, piers, car parks, bike paths and beach access points will be shut off from midnight on 3 July until 05:00am on 6 July local time.
• Japan’s unemployment rate rose to 2.9% in May. The 0.3pp rise from April suggests Japan’s first recession since 2015 is beginning to have an impact on the labour market.
• The Governor of Arizona has ordered bars, movie theatres, gyms and water parks to shut down, in a dramatic move that echoed similar efforts by states around the country to roll back plans for re-opening.
• French consumer spending rebounded in May. The Insee official stats agency said that consumer spending rose 36.6% in May from April, when it had plunged 19.1%, following a 16% drop in March. Consumer spending remains down 7.2% from pre-crisis levels in February.
• Stay-at-home orders imposed on ten postcode areas in Victoria, Australia.
China has stopped almost all imports of pork from the Netherlands following Covid-19 outbreaks at some of the largest Dutch slaughterhouses. China banned meat delivered by four of the largest Dutch abattoirs on Sunday.
• The UK has approved the resumption of tests into whether a controversial malaria drug can be used to treat coronavirus. Regulators say hydroxychloroquine and a similar drug, chloroquine, can be given to healthcare workers in a clinical study to test the theory.
• The Geneva Motor Show has decided to scrap next year’s event after this year’s was cancelled. The international auto show was due to take place in March 2021, but the company behind it has seen weak demand from car brands and exhibitors.
• Chile’s unemployment rate hit 11.2% between March and May amid the coronavirus lockdown, according to the country’s government
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