Coronavirus - False dawn
7 April 2020
On Thursday, the Prime Minister was seen clapping for the NHS on the steps of Number 10 and the worst of his symptoms seemed to be improving. Days later he was admitted to intensive care, where his condition is reported to be stable. The effect on business and the economy could take a similar course. Stocks have rallied this week on positive infection rate trends emerging from Europe. However, as the impact from the global lockdown continues, governments will be desperate to begin exit strategies. Many will jump the gun. Until there is effective testing, a vaccine, or herd immunity is achieved, secondary outbreaks will occur.
Cases - 73,135 Deaths - 5,227
Cases - 1,348,006 Deaths - 74,729
• Boris Johnson spends the night in intensive care.
• Japan has declared a state of emergency.
• WhatsApp has put heavy restrictions on forwarded messages to try to stop the spread of coronavirus misinformation.
• La Liga Spain’s domestic football season may resume as early as 28 May.
• Paris authorities have banned daytime jogging.
• US insurers are returning premiums to customers.
• CEBR data per sector Link
• Google mobility data Link
• US hospital report Link
• China says it has not recorded a single coronavirus death in the past day.
• Mercedes has begun production of the breathing aid its F1 team developed.
Buildings & Construction
• Homeserve – “The Board’s current decision is not to furlough or make redundant any staff in the course of the Covid-19 lockdowns, in order to do the right thing for HomeServe’s teams and maintain maximum flexibility in the way the business is run.
HomeServe’s c.6,000 office-based staff, including contact centre agents, are all working successfully from home thanks to a monumental effort by operations staff and recent technology investments.
Delivering for customers – HomeServe is continuing to respond to emergency repair requests from customers in all the countries where it operates, and is completing an average 150 jobs every hour.
In the field, additional social distancing procedures have been put in place to safeguard engineers and homeowners.
Supporting Trades – At Checkatrade, Trades are pro-actively being offered a 50% membership discount for April and May if they want to continue to feature in consumer searches. If they wish to maintain their presence on the platform but, for now, not appear in searches, they are being offered free-of-charge affiliate membership, which is also being offered to new Trades that wish to join and build their online presence.
Management action – HomeServe acknowledges that the situation with Covid-19 is unprecedented and continually evolving, and is taking action to preserve profitability and reduce discretionary spend and capital expenditure.
In Membership, HomeServe's business model remains resilient. Policy retention – the key top line driver – remains strong. Response rates to marketing campaigns held up well through March and on-line new customer sign-ups continue. The Membership cost base is approximately one third variable, with marketing spend discretionary and affinity partner commissions linked directly to new sales and renewals. Going into the quieter period for marketing, the decision has been taken to pause most campaigns. Both new customer additions and costs will reduce as a result.
Checkatrade, Habitissimo and eLocal experienced falling demand from consumers from mid-March in light of government directives to minimise unnecessary contact. The performance of these businesses is currently much less material to the Group's overall financial performance, accounting for c.10% of revenue. Marketing has been substantially reduced at Checkatrade, while in Habitissimo and eLocal, there is a natural offset between reduced traffic on the platforms and the expense involved in generating leads.
HomeServe will continue to make selective investments for the future in anticipation of substantial demand for home repairs and improvements when the period of lockdown ends. While mergers and acquisitions activity is largely on hold, HomeServe is ready to act quickly if opportunities arise.”
• AlphaFX – “Due to the rapid acceleration of Covid-19 and consequential government enforced lockdowns in major economies affecting global trade, on 30 March 2020 the Group announced that it expected revenue and underlying earnings for this financial year to be broadly close to its FY2019 results. The Group also announced that, due to unprecedented volatility in the USD/NOK resulting from Covid-19 and the oil price collapse, one of its clients was unable to settle an obligation of £30.2 million without reneging on contracts it held with global supermarket chains, who had sharply increased their orders following the Covid-19 outbreak.
On 2 April 2020, the Group entered into a legal settlement agreement with this client whereby the outstanding amount owed to the Group would be repaid in full. Under the terms of the settlement agreement, an initial payment of £1.05 million was received by the Group on 3 April 2020, with the client contracted to repay the balance of the £30.2 million amount owed in equal weekly instalments up to 10 June 2022. The settlement agreement also requires the client to make accelerated repayments of the obligation should the client's profit exceed certain thresholds. Accordingly, the Group expects a minimum of £10.4 million (34%) of the amount owed to be repaid by 31 December 2020.
In light of current macroeconomic conditions and the client repayment obligation, the Group has taken steps to maximise its return on current capital. Hedging of non-major currencies (which require higher levels of collateral), are being 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 and derivative book. Going forward, the Company will continue to maintain its diversified revenue profile - for FY2019 the Group provided services to clients in 36 sectors, with the highest exposure in manufacturing, at 9%. Finally, as Alpha Payment Solutions continues to build momentum, the proportion of Group revenues that comes from products which do not require collateral is expected to continue its upward trend (from 15% in FY2018 to 30% in FY2019).
Whilst Alpha is currently able to service new and existing clients, as the Group continues to grow and diversify its revenue streams the Board anticipates that the Group will want to pursue new business opportunities. Those opportunities could comprise repeat orders from existing clients (many of which increase their spend with Alpha year on year) and orders from new clients, whose existing providers cannot service all of their FX risk management and payment needs. The Group would like the ability to capitalise on all good new business opportunities and in doing so increase its market share in the current challenging market environment. Accordingly, the Group therefore proposes to raise gross proceeds of £20 million to:
• acquire new clients; and
• continue investment in new products and markets: including Alpha Payment Solutions, Canada and the Netherlands
Assuming that £20 million is raised under the Placing, the Placing will leave the Group with approximately £35 million of adjusted free cash on its balance sheet.”
• Impax Asset Management# – “Despite the recent sharp fall in markets, Impax's performance in the second quarter of our financial year has been robust. Over the three months to 31 March 2020 net inflows were £1.1 billion, a number that includes positive net inflows of £6.0 million during the month of March.
The companies that we invest in are generally well established with experienced management teams, diversified business models and strong balance sheets. Consequently, over recent months we have had almost no financial exposure to distressed companies.
Although conversion timeframes may lengthen, our new business pipeline remains strong and we anticipate that post the current crisis there will be increased interest among asset owners in the investment strategies that Impax offers, particularly those that provide exposure to mitigating and adapting to climate change, reducing pollution and navigating a path towards a more sustainable economy”
• Plus500 – “Benefitting from our operations being entirely online, there has been no operational impact from the Covid-19 pandemic to date. The business has been functioning successfully, maintaining the same high quality of service while handling significantly increased workloads in respect of customer enquiries and market activity; this demonstrates the robustness of the Group's trading platform, systems and infrastructure and the quality of its technology and people.
In the three months ended 31 March 2020, the Group's revenue was $316.6m, an increase of 487% compared to the same period last year (Q1 2019: $53.9m). This has been achieved as a result of significantly increased volatility across global financial markets, which has in turn driven higher levels of customer trading activity coupled with an increased rate of New Customer acquisition. Customer Income represented approximately 74% of Q1 revenue (Q1 2019: 152%).
Active Customers increased to 194,024 during the period, a rise of 98% versus Q1 2019. New Customer acquisition improved 289% compared to Q1 2019 as the Group's market leading customer proposition, paired with its efficient marketing algorithms and the volatility of financial markets, attracted new sign ups. Encouragingly, the majority of New Customers came from higher value jurisdictions, which the Group believes will deliver attractive customer lifetime value. ARPU showed a 197% improvement against Q1 2019 and a 69% improvement against Q4 2019, primarily thanks to record levels of Customer Income due to greater levels of engagement on our trading platform. The revenues derived from Customer Trading Performance in the first quarter are expected to revert to their medium-term historic level of near zero over time.”
Food, Drinks & Household
• Hilton Food – “The current evolving Covid-19 outbreak is a fast moving virus which presents major challenges for people and economies across the globe. There is significant uncertainty over the extent of the impact and longevity of the outbreak. Food production is a key industry so our challenge is to keep our facilities open, as part of an integrated supply chain, to ensure that our retailer partners are able to adapt to the currently increasing consumer demand for protein-based products. All of our facilities remain fully operational, and in addition we have established business continuity and flexible buy models and supply options, which may be tested during this period as we continue to play our part in feeding the nation and supporting ongoing demand. The dedication and resilience of our teams will be tested as we respond to this challenge. To date they have responded superbly and have risen to the challenge.
The health and wellbeing of our people is paramount and we have established a number of protocols to protect our people and to minimise contact. We are prioritising those that are most susceptible to Covid-19 including those with underlying health conditions. Travel by our colleagues, in line with government restrictions, is strictly managed as are visitors to, and movements within, our facilities together with extensive cleaning regimes and hand-sanitising stations. We have plans in place to respond to any virus spread within our facilities and to mitigate any resourcing shortfall through additional use of temporary labour.
We are dependent on our key suppliers to maintain a continued supply of raw material and packaging materials and we are in daily contact with them to manage availability and identify key critical product lines which must be delivered and those that could be postponed. There have not been any significant issues experienced to date.
We have a strong balance sheet including significant cash balances of £110m at the year end plus current committed but undrawn loan facilities of £116m. The resilience of the Group in the face of the uncertain challenges presented by Covid-19 has been assessed by applying significant downside sensitivities to the Group's cash flow projections. Allowing for these sensitivities and potential mitigating actions the Board is satisfied that the Group is able to continue to operate well within its banking covenants and has adequate headroom under its existing committed facilities.”
• Alliance Pharma – “As a diversified global business, we have been paying close attention to the Covid-19 pandemic and our position on this remains as announced on 23 March 2020.
We have good control of our cost base and will continue to manage our levels of discretionary spend carefully to help mitigate the potential impact of any reduction in revenue as a result of Covid-19. We have also decided it would be prudent at this time to preserve cash and therefore have taken the decision not to propose a final dividend for year ended 31 December 2019. We will provide further updates at our AGM in May, in our H1 trading update in July and at other times as appropriate.
Notwithstanding the current uncertainty created by the coronavirus, our underlying business remains resilient, with strong financials, good liquidity and covenant headroom, and we look forward to continuing our path of growth in the years ahead.”
• Cello Health – “Following the publication of the Preliminary 2019 Results on 18 March 2020, the Group has continued to trade well in the first quarter of 2020 in line with management expectations, with good revenue growth in the Cello Health division and solid operating cash generation. The Group continues to have a strong cash position at the end of March of approximately £11.7m. The Group has total facilities of £24.0m with RBS, of which £7.0m are drawn down at 31 March 2020.
Within the Cello Health division, there is some evidence of deferral of certain types of work where live meetings are essential. However, in the majority of cases project work has continued and overall our recent booking levels have remained encouraging. Some of our non-healthcare clients have needed to delay or cancel certain projects.
The Group has a strong cash position and is encouraged by the good progress made in the first quarter against its plans. Nevertheless, the Board is prudently reviewing the cost base in light of the changed trading environment. In many cases, budgeted hiring plans and uncommitted expenditure are being reduced or deferred. In those parts of the Group which are impacted by client deferrals or cancellations, appropriate staff cost saving initiatives, including part-time working and furloughing, will be implemented. In addition, the Board have agreed not to proceed with their planned inflationary pay rises for 2020 and to institute a 10% reduction in their salary and fees for a three month period. In addition, cash flow is being tightly controlled, and major outgoings delayed where possible, including VAT payments and US tax payments where permitted by law. Capital expenditure will also be appropriately reduced.
Dividends – The Group has a strong balance sheet and remains cash generative. However, in order to maintain as much flexibility as possible throughout this period of uncertainty, the Group has decided to withdraw its full year final dividend resolution of 2.95p which was to have been tabled at the AGM on 20 May 2020, and which was previously announced in the Preliminary Results on 18 March 2020. Instead, the Board has declared an interim dividend of 1.0p, payable on 22 May 2020 to all holders on the register as at 24 April 2020. The Group fully recognises the importance of dividends to shareholders, many of whom are also employees and accordingly the Board aims to declare a special dividend to be paid either before or alongside the next interim dividend, subject to future trading performance and the outlook for the Group.
• Medica Group – “The full impact of Covid-19 on revenue growth for the rest of the year is as yet unknown. The situation is unfolding and difficult to forecast at present. However, to date, the Company has experienced a significant reduction in both NightHawk and Routine cases being outsourced by our NHS clients.
In the case of NightHawk, the Company is experiencing a decline of around 50% in out-of-hours reporting activity. We could expect this to fall further to between 60-70%. The main factor driving the decline is the reduction of typical A&E admissions as the public are isolating at home. Any further fall from current levels may be offset by an increase in Covid-19 related imaging as the pandemic continues. In the last two weeks, we have tailored our NightHawk service to ensure we are able to support our NHS clients with dedicated Covid-19 care pathways.
In terms of Routine activity, the Company is experiencing a decline of around 90% in activity with many NHS hospitals having already suspended non-urgent elective procedures. We could expect up to 100% reduction in activity overall as the situation evolves and the NHS focus shifts entirely to dealing with Covid-19 cases. In terms of mitigation, we expect deferred elective cases to accumulate in the health system and this will lead to increased pressure to report routine cases later in the year.”
• EKF Diagnostics – “Trading in 2020 to date has been satisfactory and in line with management expectations. We believe the outlook for 2020 is positive for the following reasons:
• EKF has substantial net cash balances (£14.3m as at 20 March 2020);
• EKF has strong free cash flow;
• The business remains robust due to the demand for diabetes and haemoglobin tests, which we expect to be in part driven by the fact that patients that need these tests are also in the at higher risk category for contracting Covid-19; and
• EKF benefits from the exchange rate as we are a dollar and Euro denominated business. EKF is also able to manage currency across its operations in the UK, US and Europe.
Production scale up for Covid-19 test component demand – EKF Diagnostics is rapidly scaling up production for the US and globally to meet the demand of one of the core components in the Covid-19 molecular testing supply chain, PrimeStore MTM. Sample collection and transport is an essential part of Covid-19 testing as PrimeStore MTM is the first and only US FDA Cleared Microbial Nucleic Acid Storage and Transport Device and was designed for viral pandemics. PrimeStore MTM deactivates the pathogens in the sample, rendering them non-infectious, allowing for safe transport and laboratory handling. Samples collected using this device can also be maintained at ambient temperature for days, eliminating the need for cold chain procedures, and handled at laboratories with a lower biosafety containment rating than is otherwise required. This has the benefit of significantly increasing the number and spread of laboratories able to handle samples.
EKF Diagnostics is an existing contract manufacturing partner of Longhorn Vaccines and Diagnostics LLC (LHNVD), the inventor and owner of PrimeStore MTM. We have seen growing demand for the sample collection device manufactured at our Boerne Texas site. Initial purchase orders are nearing $1m and we expect that to continue to grow significantly.
Operational mitigation – The recent Covid-19 pandemic has created uncertainty in the market in the short term. Many countries are either closed or on the verge of being shut down, and government action is having a significant effect on economies across world. The eventual severity and length of the economic disruption is impossible to forecast. We believe we have a robust plan in place to mitigate the effect of the disruption on the business including taking the following actions (amongst others):
• Organising for as many staff as possible to work from home.
• Improving our computer networking to facilitate remote working.
• Gaining designation as a company essential to basic medical care which allows our premises to remain open even in a lockdown – we have already gained approval from the German authorities to keep the Barleben factory open in such circumstances.
• Improved social distancing by limiting physical meetings, expanding flexible working, and altering production practices.
• Preparing requests for support from local authorities should we have to reduce working hours.
• Banning international travel and limiting domestic travel.
• Increasing supplier and customer contact so as to be able to anticipate issues and react quickly.
• Increasing raw material stock holding.
• Increasing cleaning and disinfection cycles.
We have insurance cover in place in case there is a loss of business, although it cannot be guaranteed that cover will be sufficient to protect against all eventualities.
At the date of this announcement we have seen limited disruption to either our customer or supplier logistics (although we have noticed some increases in the cost of airfreight). Revenue generation from our core business has been very largely unaffected. Indeed, we are now providing a key component into the Covid-19 testing supply chain. We have modelled a number of scenarios covering reductions in revenue of 10% and 50%, without taking into account the potential benefits of any mitigation strategies such as potential cost savings or insurance claims. We have also modelled out 100% reductions in revenue with cost savings within our control.
As a result of our current strong cash balances and robust business, we are confident that the business can survive even catastrophic reductions in revenue for at least the next 12 months.”
• Victrex – “Although trading has remained in line with expectations year-to-date and the third quarter has shown early signs of a solid start, including some normal demand returning across parts of Asia, the macro-economic and end-market outlook over the coming months is very uncertain, particularly for Europe and the US.”
• Zotefoams# – “The challenging market conditions experienced in the latter part of 2019, particularly within our Polyolefin Foams business, have yet to improve noticeably. Adding to this, the outbreak of the Covid-19 virus is causing additional disruption.
Based largely on the expected demand profile for HPP products across a number of markets, the Board anticipates a stronger performance during the second half of the year. We are, however, mindful that the further spread of the virus, and responses to this, have created significant uncertainty in the near term with likely adverse trading impacts on operations and demand patterns.
In light of these exceptional circumstances, Zotefoams is currently focused on cash, including cost and capital management, and maintaining core operational capability across our business. We have a diverse customer base and strong competitive position, with our proprietary product portfolio focused on long term structural growth applications. This enables Zotefoams to continue to develop attractive new markets for its products and underpins the Board's confidence in the Group's future prospects.
As expected, since 24 March 2020 market conditions have remained challenging, with high levels of customer uncertainty, subdued market demand and rapid response times expected by customers. Using recently commissioned Group capacity, Zotefoams has aggressively targeted market share in discrete segments, the benefit of which is slowly being realised. We have also implemented strict cost and capital control throughout the business and are considering all elements of government support across our operating sites around the world. As a result of the measures the Group is taking, we believe we have sufficient liquidity to navigate through this uncertain period.”
• Sabre – “We intend to continue to employ all of our colleagues on their full salaries, all of whom are working highly effectively from home, and do not currently believe we will need to take advantage of any of the available Government support. We are seeking to support our smaller suppliers and local stakeholders through this period, and have also offered all colleagues paid leave each week to support NHS or other volunteering.
Our modelling of Covid-19 scenarios does not suggest that we would undermine our capital base in any reasonably foreseeable stressed scenario and that we will continue to be profitable and capital generative. If more extreme scenarios were to occur these would be likely to reduce future years' profitability and dividends.
The situation is, however, rapidly changing and unforeseen challenges and social and economic scenarios could occur.
The Group has an established dividend policy to pay a full year ordinary dividend of 70% of adjusted profit after tax (‘PAT’), and to return excess capital to shareholders as appropriate. Notwithstanding the strong cash generation in 2019 and the Group's robust capital position, the Board intends only to propose an ordinary dividend of 8.1p in respect of the full year 2019 at this stage.
Given the unprecedented nature of the response to Covid-19 and uncertainty as to the length of Government restrictions, the Board has determined that it is prudent to withhold any element of special distribution of excess capital. The Board may propose an interim dividend representing the return of surplus capital later in the financial year should the situation become clearer.”
• Cineworld – “The Group's entire estate of 787 cinemas in 10 countries has been closed as a result of Covid-19, a situation impossible to imagine a few months ago. This has obviously been extremely challenging in many respects and our first priority has been the health and safety of our customers, employees and other stakeholders.
Every effort is being made to mitigate the effect of the closures, to assist our employees and to preserve cash. These efforts include discussions with our landlords, the film studios and major suppliers, as well as curtailing all currently unnecessary capital expenditure. This is a painful but necessary process as before the onslaught of the Covid-19 virus, we were excited and confident about the Group's future prospects. We are also discussing the Group's ongoing liquidity requirements with our RCF banks.
We welcome the emergency support programmes to protect jobs and business that have been announced in our markets and will access them as appropriate.
We continue to monitor progress of the Group's proposed acquisition of Cineplex, Inc.
Given the importance of conserving cash wherever possible, the Board has decided to suspend payment of the 2019 fourth quarter dividend of 4.25c per share and upcoming 2020 quarterly dividends. The Board will keep this position under review.
Until there is greater clarity on the prevailing circumstances and given the impact of Covid-19 on many of our employees, the executive Directors have voluntarily agreed to defer payment of their full salaries and any bonuses to which they are entitled. Similarly, during this period the non-executive Directors will defer their fees.”
• 4imprint# – “In our previous Covid-19 update dated 19 March 2020, we indicated that daily order counts had reduced to around 40% of prior year, reflecting the impact of the initial spread of the disease and associated bans on travel and large gatherings. Since then, ‘Safer at Home’ or similar directives in nearly every state in the US and all of the UK have resulted in daily order counts that have been running at about 20% of the 2019 comparative. We anticipate that this limited level of activity is likely to continue until these restrictions begin to be lifted and economic activity starts to improve. Although our locations in Oshkosh, Wisconsin and Manchester, UK are closed, the business is running and we are able to provide service to our customers through an expanded 'work from home' capability.
Our people remain our first priority. We continue to operate in compliance with the latest governmental guidelines to ensure their health and safety. In line with our culture, and to enable us to capitalise rapidly on opportunities presented by a future recovery, our plan prioritises the retention of our team members. It is possible that certain government programmes will be accessible to 4imprint to assist in this regard.
Cost control and cash conservation are top of mind in all areas of the business. Discretionary cost, whether overhead or capital, is being tightly controlled in order to provide the business with maximum flexibility going forward. After cost of product, marketing is the largest expense in the business. The marketing portfolio has been radically re-shaped in a very short space of time, resulting in a mix that is appropriate to current circumstances in terms of both type and cost, but equally provides a firm platform to take full advantage of improving conditions when they occur.
4imprint remains in a strong financial position, with significant liquidity available to weather the storm and emerge in a favourable position. At the end of the first quarter of 2020 the Group had over $50m in cash balances. Given the inherent uncertainty as to how quickly markets might recover, and in order to maintain maximum flexibility, the Board has taken the prudent step of withdrawing its recommendation to pay a final dividend in May 2020. The dividend of 59.00c will no longer be paid and will result in extra cash of around $16m being available to the Group. The Board has not fundamentally changed its dividend policy, and it will reassess its position in coming months as the situation becomes clearer.
Whilst we are taking decisive action on cash conservation and are fully engaged in the continuous refinement and execution of our plan to ensure that the Group emerges in a strong position for the long term, we believe it is still too early to assess the duration and full economic impact resulting from Covid-19. We therefore provide no forward guidance at this stage for 2020.”
• Audioboom – “We are still developing an understanding of how Covid-19 will impact podcasting. Early indications are that we will see more caution from advertisers during Q2, although they remain committed to the podcast medium by increasing their levels of long-term support for proven networks. The Board will continue to monitor these developments closely, but believes that Audioboom remains in a strong position”
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