Coronavirus - Natural selection
30 March 2020
Today Carluccio’s and Brighthouse filed for administration. Both companies, like Flybe which collapsed earlier this month, were weak before the global outbreak of coronavirus. Weaker companies will continue to fail during this crisis and if, as hoped, government measures are sufficient to keep the stronger afloat, the competitive landscape will be very different on the other side of the pandemic. However, it is unknown which consumer behaviours will return to normal and which will be permanently changed.
•Toyota asking for JPY1tr credit line Link.
•UK debt downgraded – Link.
•Arcadia agrees with pension trustees to suspend payments Link.
•Resolution Foundation suggests freezing minimum wage to October.Link.
•Births to surge due to lockdown and shortage of condoms Link.
•Australia tightens foreign investment rules Link.
•EasyJet grounds all planes.
•Stelios letter to EasyJet re Airbus Link.
•Johnson & Johnson said it could have a Covid-19 vaccine available foremergency use early next year and it would begin manufacturing thevaccine immediately. The company signed a $450m contract with theUS government.
•NHS embracing tech. 11 suppliers have been appointed to work onprimary care on remote monitoring/caring for patients. This was doneafter a 48-hour tender – normally these sort of initiatives takemonths/years. Link.
•HSJ reporting that the NHS has seen a >30% reduction in A&Eattendances. Result of fewer accidents and more responsible use of A&E.
•Contactless limit increased across Europe link.
•Births to surge due to lockdown and shortage of condoms Link.
Buildings & Construction
• Glenveagh Properties – “In line with updated government guidance to combat the spread of Covid-19 the Group affected an orderly and safe closure of all our construction sites. The Group will reopen these sites when the Government confirms that it is appropriate to do so.
As noted in the Group's statement of 26 March, Glenveagh continues to benefit from a robust balance sheet with net debt of approximately €4 million, cash resources and available committed facilities of €121 million (plus a further €125 million of uncommitted facilities) at 25 March. In addition, the Group has significant net assets (€867 million), no outstanding land payments and strong covenant headroom.”
• Grafton – “Following an announcement by the Irish Government of new restrictions to slow the spread of the Covid-19 virus including the closure of non-essential businesses for a two-week period with effect from midnight on Friday 27 March 2020.
This development has led to the closure of the Woodie's DIY, Home and Garden business and to a significant scaling down of the operations of the distribution business in the Republic of Ireland which will supply materials on a delivery-only basis to essential health projects, critical road and utility infrastructure and emergency supplies to businesses and homes in line with the new public health guidelines.”
• Purplebricks# – “Since the Government's restrictions on movement were implemented, the Company has seen a weakening in vendor and purchaser activity. Purplebricks also notes the Government's announcement regarding the housing market on Thursday evening which it is evaluating and anticipates it will have a further negative impact on instruction and completion volumes.
Mitigation Measures – Given the market uncertainty, the Company has taken immediate and significant measures to preserve cash and implement a lean operating model through this period. Purplebricks has undertaken a cost base assessment and has instituted a number of cost-saving measures, including reducing supplier costs and overheads. All TV and radio advertising has been suspended and online marketing costs have significantly reduced. The Company also be using the Government's COVID-19 Job Retention Scheme and are currently assessing how to implement.
The Company currently retains c.£35 million of cash on its balance sheet and has no debt. Following these stringent cost cutting measures there will be a materially reduced level of cash burn if revenue is significantly reduced over a sustained period of time.
Outlook – The Covid-19 situation continues to evolve and is likely to remain uncertain for some time. However, given the recent impacts Purplebricks now expects revenues to be below expectations for the full year to April 2020. It is too early to predict the impact on The Company’s financial performance for the 2021 financial year until the impact of COVID-19 on the housing market becomes clearer.”
• Sureserve – “A number of companies within the Sureserve Group have been classed as Key Service providers to critical sectors under the UK Government Guidelines in relation to Covid-19. As a result, these Group company employees are recognised as Key Workers and it is deemed essential that they continue to perform their duties.
As reported at the Group's AGM on the 18th March 2020, we have agreed protocols in place with a number of our clients to deal with this emergency. During this evolving and unprecedented crisis, we have adapted working practices to ensure the health and safety of all employees, Company stakeholders and all we serve which we believe is of primary importance.
In recognition of the Group's strong balance sheet and financial position, the Board can reaffirm that the Group will pay a Final Dividend for the financial year ended 30th September 2019 of 0.5 pence per ordinary share on 30th April 2020 to all shareholders on the register on 31st January 2020.”
Food, Drinks & Household
• Greencore – “Since the UK Government's escalating measures to combat the outbreak, as announced on 24 March, consumer demand and shopper behaviours have changed rapidly. There has been a marked reduction in demand for the Group's food to go categories in grocery retail, which has been partly offset by the sustained volume growth in the Group's other convenience categories. The Group is working hard with customers as well as Government agencies, including the NHS and local communities, to leverage our capability and capacity to provide high quality fresh prepared food to both consumers and frontline workers during this pandemic.
In addition, the Group is taking prudent measures to protect profitability and cash flow. Firstly, the Group is tightening its food to go production network and furloughing impacted colleagues, using the Government's Coronavirus Job Retention Scheme. The Group is also working to eliminate non-essential operating costs. The Board and the Executive Directors have voluntarily agreed to take a 30% reduction in respective fees and base salary for a period of three months, with the wider Group Leadership Team also taking a voluntary reduction of 20% of base salary for the same period. This will be kept under review.
In this context and given the ongoing level of uncertainty around the possible duration and impact of COVID-19, the Group is suspending financial guidance for FY20 and the Group's outlook for FY20 included in our FY19 Full Year Results Statement and FY20 Q1 Trading Update should no longer be considered current.
The Group will continue to focus on balance sheet strength and liquidity. It will defer a substantial portion of previously planned capital expenditure and will not be proceeding with an interim FY20 dividend payment. Overall, the Group retains substantial and increased financial headroom, with cash and undrawn committed bank facilities of approximately £265m at 27 March 2020. This includes a newly agreed additional £75m committed debt facility which matures in March 2021.’
• National Milk Records – “The continuous nature of milk supply is such that it largely cannot be dialled up and down to adjust for issues such as Covid-19, however the switch of the public’s dairy product buying pattern from outlets such as coffee shops and restaurants to supermarkets is naturally putting strain on the milk processing community. Our core service, payment testing of bulk milk samples, is anticipated to be largely uninterrupted and NMR has extensive contingency plans to minimise the effect of potential staff shortages in the laboratories. The majority of milk recording services rely on farm visits from field technicians and will be impacted by the effects of social distancing. Milk recording and associated disease testing (eg Johne's disease) account for c60% of the company's turnover. Whilst this is expected to have an impact on the Company's ability to procure samples for testing, milk recording services are an essential component of herd performance and health management and as such NMR is promoting its 'self-serve' offering by which the farmer takes the samples themselves. The impact any transition to 'self-serve' will have on earnings is difficult to quantify at this stage as the depth and duration of the COVID-19 outbreak is unknown, although the relative margins of the assisted and self-serve models are similar.
Protection of the health and welfare of staff is paramount for NMR, and their role in limiting movement of people and visitors to sites is not underestimated. As such NMR has enabled home-working for all employees who are able to do so, and the recent deployment of cloud-based Office365 platforms has made this straightforward. Where on-site work is required, such as in laboratories, and limited services from office operations, NMR is maintaining strict hand-hygiene protocols and enforcing social distancing for all staff. Measures to separate key staff, such as managers and deputies, are also being implemented. The Board of NMR are consistently monitoring Government and regulatory measures and implementing the appropriate changes.
NMR provides essential services to the food supply chain and therefore NMR workers are defined as key workers by the Government. Whilst this may provide some protection against scarce resources, the potential length of the school closure period and availability of alternative childcare arrangements brings uncertainty to resource models. NMR is building contingency arrangements on a site-by-site basis.
The Directors remain assured that the Company has sufficient liquid funds and access to debt facilities for its current purposes. We are nevertheless acting prudently to preserve cash to ensure investment in new projects planned for 2020 can go ahead. Investment will continue as planned however and as stated in our Interim announcement investment in the second half of our financial year is expected to be lower than in the first half. The Company will also take advantage of the VAT deferral element of the Government's COVID-19 support to businesses.
Lastly, the restrictions on large gatherings and events will limit marketing activity in the key Spring and Summer season for agricultural shows.”
• John Lewis of Hungerford – “Further to the Prime Minister's broadcast on 16 March 2020 in relation to the worsening impact of COVID-19, the Company's showrooms had been operating effectively on an appointment only basis since 18 March 2020. Following the broadcast by the Prime Minister on 23 March 2020 and in accordance with the UK Government's edict requiring all non-essential retail to close, the Board took the decision to temporarily close its showroom estate with immediate effect, continuing to operate remotely, together with instituting an orderly wind down of operations at the Company's factory facility in Wantage, Oxfordshire and accordingly ceasing production with effect from 27 March 2020.
The showroom and factory closures will remain in place initially for a three week period. Production for orders against which a deposit has already been received from customers will be resumed when Government guidance confirms it is safe for employees to return to the Company's manufacturing facility.
The Company's immediate focus is on cash preservation. The Company is exploring all available options to mitigate the revenue loss by implementing cost-cutting measures including cessation of capital expenditure and seeking preferential terms from landlords and suppliers. In addition, the Company intends to utilise UK Government support measures, where appropriate for the Company, including VAT payment holidays and PAYE deferral if required, while evaluating additional bank funding via the Government guarantee schemes. The Company will be furloughing staff, utilising the Government's employment retention scheme thereby seeking to retain all employees, wherever possible, as requested by the UK Government.
At this time, it is very difficult for anyone to forecast when the COVID-19 pandemic will abate such that normal life can re-commence. The Company's revenues, as with many other UK businesses in the home improvement and construction sector, will be significantly impacted by the shutdown and the overarching uncertainty in the global economy. Accordingly, we now have reduced visibility on the financial implications for our Company.
On 27 March 2020, the Company had liquidity of £350k. The Company had recently completed a formal independent revaluation of its freehold properties, which resulted in an increased valuation of £1.9m (compared with a balance sheet net book value of £1.2m). We are now in advanced discussions with a new liquidity provider in relation to increasing our net facilities against the freehold, if required. The Company is also in discussions with its existing bank in relation to liquidity.
In addition, the Company is preparing documentation in order to apply for a loan under the Coronavirus Business Interruption Loan Scheme for SMEs through the British Business Bank. It is not yet known whether the Company would be eligible for such a loan.”
• Mohawk Industries – Says parts of its operations have curtailed or production suspended due to COVID-19, with Europe being the most impacted in Q1.
The company is unable to reliably predict the extent to which the COVID-19 pandemic will affect its future performance.
Mohawk says its balance sheet remains very strong today with availability of cash and borrowing of $1.1B under its revolving credit facility. The company says it can use a revolver to pay a €300M loan due in May if necessary.
• Alpha FX – “Since 18 March, the rapid acceleration of Covid-19 and consequential government enforced lockdowns in major economies has resulted in an unprecedented and ongoing slowdown in global trade. Whilst the Group has recorded a strong first quarter, including a record quarter from Alpha Payment Solutions, it is also mindful that the need for clients to transact FX is closely linked to global trading activity. Although it is difficult to forecast in the current environment, we currently anticipate a reduction in FX activity, and in particular forward contracts, as our clients delay or even cancel their commercial activities until their outlook becomes clearer. As a result, at this early stage of the Covid-19 crisis the Board's preliminary view is that revenue and underlying earnings will be broadly close to FY2019 results. Mindful of current macro conditions, we will also be considering whether to increase our bad debt provision.
The acceleration of Covid-19 coupled with the oil price collapse has led to unprecedented falls in the value of certain currencies and accordingly has meant that 223 of our clients saw their forward contracts deviate significantly in fair value. These clients have therefore been required to pay Alpha margin in order to fulfil their contractual obligations with the Group and keep their contracts open. However, one client faced with working capital shortages in its own business, requires more time to settle its outstanding payment obligations of £30.2m to the Group. To support this client, we are in the process of negotiating a payment plan, which has created a temporary shortfall in the Group's own cash for use as collateral.
Despite the temporary reduction in collateral to place against new forward contracts, the Group is confident in delivering on its revised expectations for the year and the FX requirements of new and existing clients. The Group has built a strong cash and liquidity position since inception and had a very healthy cash position going into this crisis, with net assets increasing by 18% to £57.6m in FY2019 and significant excess cash which it was yet to deploy. Furthermore, following cancellation of the aforementioned client's contracts, the Group is now also able to unlock £9.2m of ring-fenced cash, which was previously allocated as collateral against the client's positions as part of the Group's regular stress testing. Finally, the proportion of Group revenues that came from non-forward products, for which collateral is not required, increased from 15% in 2018 to 30% in 2019, and we expect this trend to continue as our product offering expands, and Alpha Payment Solutions continues to gain traction.
The Group is also working proactively during this period of uncertainty to maximise the amount of collateral it has in the business at any one time. Hedging of non-major currencies (which require higher levels of collateral) will be reduced in this climate, in favour of the Group's major traded currencies (Sterling, Euro, Dollar and Canadian Dollar), which currently make up 86% of Alpha's forward book. Additionally, as discussed further below, our final dividend payment for FY2019 will be cancelled, enabling the Group to apply a further £2m of collateral to our forward book.
The £30.2m owed to Alpha is derived from the Group's largest forward contract client, a global exporter of food produce, previously representing approximately 15% of the Group's forward book. his client held a number of sizeable forward contracts with the Group, primarily selling US Dollars to buy Norwegian Krone ('USDNOK'). In the week commencing 16 March, the Norwegian Krone fell as much as 15.9% against the US Dollar: the largest weekly move in the currency pair's history and nearly three times its previous largest fall of 6.4%, recorded during the 2008 financial crisis. Whilst the client continued to settle their obligations on time as the NOK depreciated over 15% from 1 January to 16 March, the size and speed of a further 15.9% fall caused by the acceleration of COVID-19 in the period following, meant the client subsequently became unable to pay the full margin owed on its forward contracts when due. These contracts were therefore cancelled, leaving £30.2m owed by the client to Alpha.
The client previously had a strong financial track record with Alpha, having settled hundreds of millions of pounds across hundreds of transactions with the Group, and posting significant margin right up until the week of the oil price collapse (prior to the Coid-19 outbreak). However, a sharp rise in demand for its products, predominantly from global supermarket chains who are increasing their inventory to keep up with the current rise in consumer demand, has temporarily reduced the client's available working capital. The Group is in the process of negotiating a settlement agreement with the client to provide it with a payment plan whereby the full amount is repaid in equal weekly increments, from 3 April 2020 until 3 June 2022.
The majority of Alpha's positions are well-balanced across its four major traded currencies. Outside of this, Alpha's next largest position is a Dollar-Polish Zloty exposure split across two separate clients, representing c.1% of the total forward book. Both clients are of a strong financial standing and have been able to consistently pay margin when required. We are therefore confident in our ability to weather any further volatility, should it arise.
Outlook – At this early stage of the Covid-19 crisis the Board's preliminary view is that revenue and underlying earnings will be broadly close to FY2019
Dividend – As referred to above, to maximise the size of its forward book and in doing so capitalise on opportunities that the Group is continuing to see across its markets, the Board has decided to cancel payment of the 5.4 pence per share annual dividend for 2019 which was due to be paid on 13 May 2020. This prudent course of action, which the Board believes is in the best interests of the Group and its shareholders, will provide £2 million of cash to be applied to the level of collateral for the Group's forward book. The Board recognises the importance of dividends to shareholders and intends to resume payment as soon as it is appropriate to do so.”
• ASA International – “Some of these measures, in particular the imposition of a temporary lockdown, are expected to materially impact the income generating capacity of our clients and reduce the ability of our staff to conduct regular client meetings and collect loan instalments.
In mitigating the impact of COVID-19, we will be focusing on our clients and delivering operational efficiency and cost savings across our business:
• Clients: strengthening client interaction by (smart) phone or other digital devices, collecting through group leader where possible, increasing digital collections (m-pesa, bank transfer or other payment platform), switching from weekly to bi-weekly or monthly collection where appropriate, while maintaining CSR programmes where possible in support of our clients
• Cost savings: adjusting field capacity during lockdowns, pay freezes, postponement of non-priority projects and deferral of non-essential operating expenses
Operating performance was in-line with our expectations during the first two months of 2020 without any discernible impact of Covid-19 on our loan portfolio. However, given the recent measures that governments have put or are planning to put in place to prevent the spread of Covid-19 in an increasing number of our operating countries, we expect that our business will be adversely impacted. While it is too early to quantify, we expect it will materially impact our financial performance and as a result, we withdraw our previous guidance for 2020.
As of 30 March 2020, the Company has a strong balance sheet, including approximately USD 75m of unrestricted cash across the group, and at group holding level in excess of USD 15m of undrawn credit facilities and no major debt re-financings until 2021. We decided to suspend the 2019 dividend until a final decision later in the year. The Group is in ongoing discussions about the recent developments with regulators and lenders who recognise the strength of the Group's balance sheet and business model.”Click here to read the full research note