Coronavirus - A good trade

The alert level in the UK has been reduced from 4 to 3, which should enable an acceleration in the easing of restrictions.

There will inevitably be concerns at the prospect of a second wave, but many new measures (such as face masks) and strict business operating procedures are also coming into force. According to new research from the University of Liverpool, these could be just as effective at flattening the curve but will likely need to be in place until a vaccine is found. The importance of enhancing economic growth was emphasised by the news that government borrowing reached £55bn in May.


• UK alert level reduce from 4 to 3.

• UK retail sales volumes rose 12% month on month in May.

• UK government extends rent protections for businesses.

• Lockdown re-imposed in Chennai.

• Government borrowed £55bn in May.

Company news


 LPA Group – “In our Covid-19 trading update of 1 April 2020, we reported that several UK and export customers had suspended operations leading to reduced demand and activity across the Group. However, I am pleased to report that so far during this pandemic all three LPA Sites have remained open for business.

The safety of our people has been our paramount concern and we have carefully followed and implemented government guidelines on safe working. Where possible and practical, we have utilised the government economic support schemes to ameliorate the impact of the pandemic on the business. All sites have adopted flexible working practices, allowing employees to work from home where practical and furloughing where necessary. We have flexed our capacity to match, as closely as possible, extremely variable customer demand and project management requirements during the period.

Nevertheless, I am pleased to report an improved first half performance and that the factory load for the second half, coupled with continued careful matching of capacity to variable customer short term requirements, should deliver further progress.

Sales in the first half increased 7% to £10.8m (2019: £10.1m) despite the impact of non-Covid-19 related customer project delays. Operating profit increased to £0.23m (2019: £0.18m). Profit before tax amounted to £0.2m (2019: loss after exceptional item £0.2m). Earnings per share amounted to 2.08p (2019: loss 1.20p).

Order entry, at £14.2m, fell just short of the very strong levels achieved in the first half last year (2019: £15.4m) and the order book increased 29% to £24.7m (2019: £19.2m)

Gearing, which otherwise would have reduced substantially, increased marginally to 25.6% (2019:22%), due to a substantial late overdue remittance received just after the half year end in early April.

In response to the potential cash flow impact of the Covid-19 outbreak, the proposed final dividend resolution was not put to shareholders at the AGM and thus not paid to conserve cash resources. The current cash position is very sound and in other circumstances the board would probably have considered it appropriate to confirm their confidence in the future and their commitment to a progressive dividend policy by declaring an Interim Dividend. However, under current circumstances the board consider it sensible and prudent to defer any decision on dividends to later in the year.”

 Trifast– “For the year ended 31 March 2020 (‘FY2020’), the Group is expecting to report revenues of approximately £200m which the Board believes represents a resilient performance in the face of challenging market conditions and the initial impact of the Covid-19 outbreak in the fourth quarter.

The impact of weakness in demand within certain end markets was partially offset by ongoing market share gains and an OEM-focused strategy.

As previously reported, gross margins were lower year-on-year in FY 2020, largely as a result of product mix shift and foreign exchange fluctuations particularly in Italy. Whilst operating margins have decreased as revenues reduce against a semi-fixed cost base. Subject to audit, the Group expects to report underlying PBT of approximately £17m for FY 2020.

Whilst the Group continued to invest in its strategic programme during the year, a strong cash generation performance resulted in net debt at 31 March 2020 increasing by only £2m, to c.£16m, with leverage comfortably within banking covenants at 0.80x.

Current trading and response to Covid-19 - The Group has taken swift and significant action in response to Covid-19. The welfare of its staff remains the Group’s top priority and action has been taken to facilitate working from home on a global scale (helped by early Project Atlas investments) and implementing robust policies to ensure the safety of employees as they return to work.

The Group continues to work closely with its suppliers and customers to ensure that its supply chains are protected, production lines continue to operate and to support Trifast’s reputation as a trusted and reliable counterparty. The Group’s focus on flexibility and an integrated global approach has provided resilience and, combined with the decisive actions taken by the Board, minimised the impact of Covid-19 and preserved capability.

Nevertheless, Covid-19 has had a significant impact on trading in the first quarter of FY2021. The lockdown policies implemented by various governments around the world resulted in the temporary closure of TR facilities in China, Italy, Spain, Malaysia, Singapore and India. By 30 April 2020 all of the Group’s facilities were operational, albeit with some operating at a reduced capacity. We have seen trading volumes contract, particularly in response to automotive production line shutdowns and geographical lockdowns affecting key customers in other sectors. As a result of this disruption, revenues in April 2020 were approximately 50 percent lower year-on-year, with profitability being significantly adversely impacted. Encouragingly, volumes have begun to recover in all key end markets which, together with a return to fuller operational capacity, resulted in Group revenues improving in May 2020. The current pipeline of opportunities and activity levels around the Group remain encouraging and based on current order books and customer discussions, the Board expects further recovery in June 2020, with the Group returning to underlying profitability in the month.

Financial and Liquidity Position – In addition to the operational responses outlined above, the Group has taken a number of actions to reinforce its financial position. The Board has implemented daily forecast planning around various scenarios alongside a comprehensive and evolving list of potential levers to mitigate any further adverse impact on cash and profits.

Mitigating actions taken to date are expected to realise cash savings of c.£9 million in the current year, alongside a further c.£4 million of cash deferrals. These actions include:

• Full use of all available government backed job retention and wage subsidy schemes to protect jobs.

• 20% fee and salary reduction for the Board during Q1, with no annual bonus and no salary/fee rises in FY2021.

• Short term deferral of recruitment, bonuses and annual pay-rises across the Group.

• Project Atlas re-aligned in the face of extensive travel restrictions.

• No final dividend to be proposed at the forthcoming AGM.

• Discretionary cost savings.

• Enhanced working capital management – including stock purchase re-scheduling and enhanced credit control procedures.

The Group successfully renegotiated its banking facilities in April 2019 and has access to an £80 million revolving credit facility over a 4 year term, with an option to extend for up to one year, and an additional £40 million accordion facility to support acquisitions.

The Group's banking facilities include covenants to maintain an adjusted leverage ratio of below 3.0x and an interest cover ratio above 4.0x on a rolling 12 month basis. At 31 March 2020, net debt was c.£16 million representing a leverage ratio of 0.80x and with interest cover of 30x. As at 30 April 2020, net debt had reduced to c.£14 million, with approximately £33 million of headroom under the revolving credit facility.

Outlook and Covid-19 planning assumptions – Whilst the Board believes that the level of ongoing uncertainty is such that it is not appropriate to provide detailed financial guidance for the year ending 31 March 2021 (‘FY2021’) at this stage, it has modelled and continues to monitor various scenarios for performance of the Group over the coming months.

The Board’s current base case scenario assumes the most significant, adverse impacts of the Covid-19 outbreak on the Group are experienced in the first half of FY2021, with a sustained recovery during the second half of the year and a return to more normalized market conditions in the year ending 31 March 2022 (‘FY2022’). This would result in Group revenues for FY2021 being approximately 16% below prior year levels, before growing at mid single-digit levels in FY2022 (against a normalised base). In this scenario, the adverse impact of the decline in revenue would be expected to be partially offset by the mitigating actions taken by the Board.

The Board has also modelled a severe downside scenario (the Reasonable Worse Case, ‘RWC’) which assumes a more significant adverse impact on the business from the Covid-19 outbreak in the short term and a more protracted recovery into FY2022. In the RWC, Group revenue in FY2021 is approximately 27% lower than the prior year, with very limited growth into FY2022 (against a normalised base). Whilst in this scenario, the Board would expect to take additional and more material mitigating actions, these would not be expected to fully prevent a further negative impact on profitability.

Against the Covid-19 backdrop, the Group is benefitting from the careful approach adopted to its financing strategy in recent years and the Board expects that the Group would remain within its banking covenants and maintain sufficient liquidity headroom without the benefit of the net proceeds of the Placing, even in the RWC. The Placing will however further strengthen the Group’s financial position and reduce risk enabling it to maintain an adjusted leverage position below 1.5x and facility headroom of at least £15 million, even in the RWC.

The Board believes that the Group is well positioned to respond strongly as its markets recover. As a result of the actions taken and essential business status in many cases, all of the Group's sites are currently open for business and have the ability to ramp up to full capacity. Capability has further been protected through access to government job retention and wage subsidy schemes, which have allowed the Group to retain staff at all key operating sites.

The Group has set a consistent focus on winning and growing business with multi-national OEMs at the heart of its growth strategy. As a result, the Group has been able to grow ahead of underlying markets as it benefits from the expansion of these customers into new territories as well as the ongoing trend towards supplier rationalisation. The resilience of the business through the Covid-19 outbreak and its ability to continue to provide reliable and flexible service have meant that our very high customer satisfaction levels remain in place. In an environment where the competitive landscape is disrupted and concern over supply chains has been heightened, the Board believes that the Group has the opportunity to leverage its market position to accelerate its organic growth initiatives.”


 Learning Technologies Group – “In light of Covid-19, we remain focused on the safety and wellbeing of our people and continue to serve our customers during the current market uncertainty.

LTG continues to see demand in line with management expectations. It is in a strong and resilient position and is well-placed to further consolidate the digital learning and talent sector. We thank investors for their support for our recent equity fundraising. This will enable the Group to capitalise on exciting acquisition opportunities as they emerge, as well as to capture the benefits of the acceleration of structural industry trends towards digital learning and talent management whilst maintaining a strong balance sheet. This underpins LTG's ambitious medium-term goal, to achieve c.£230 million revenues and c.£66 million adjusted EBIT on a run-rate basis by the end of 2022.

Excluding gross placing proceeds of £81.8 million received in June, net debt at 31 May 2020 was £4.5 million.”

 Hyve – “The Group notes positive commentary on governments’ easing of lockdown restrictions in a number of markets in which we operate around the world. In China, all our events, scheduled to take place in Shanghai from the end of July 2020, are currently set to run as planned. Other markets are re-opening at varying paces, but there remains a lack of clarity in some of our core markets.

Given the lead time required to prepare a successful event, the continued uncertainty and restrictions on organised gatherings, combined with multiple travel bans – both government- and corporate-imposed – the Group has cancelled a number of FY20 events over and above those reported in our last update. We are committed to ensuring that all events run by the Group maintain the high standards expected from our market-leading shows.

The Group’s largest event, Shoptalk, previously postponed from March 2020 to September 2020, has now been cancelled and will return to its original timeframe of March in 2021. Groceryshop, previously postponed from September 2020 to March 2021 to accommodate the revised date for Shoptalk, will also now return to its original timeframe of September in 2021.

Shoptalk’s Retail Meetup – a flagship omnichannel event.

Following the decision to cancel the Shoptalk 2020 in-person event in Las Vegas, we are pleased to announce the launch of a new and ground-breaking virtual event which will be held online in Q1 of FY21.

Shoptalk’s Retail Meetup is a new form of virtual event that will focus on connecting customers with both existing and new contacts. The Group expects to facilitate tens of thousands of meetings for more than 2,000 participants.

The event, which will be a proof-of-concept opportunity for the Group, builds upon Shoptalk's highly successful Hosted Retailers & Brands Program in a virtual format, bringing together established retailers and brands, direct-to-consumer and tech start-ups, large tech companies, venture capital investors, real estate developers, equity analysts, media and others for a broad range of interactions and meetings.

Insurance claims – The Group is engaged in positive and constructive dialogue with its insurers regarding event cancellation and postponement insurance, and to date we have submitted claims in relation to 17 of our FY20 events.

The Group is pleased to announce that it has received a first interim payment of £7.35m covering a number of these claims. The insurance cover is subject to the application of policy excesses and to a per event limit which varies for each event, with an overall aggregate cap in respect of all insured events to 31 October 2020 of £62m. We continue to pursue claims under the insurance policies as the event schedule undergoes further changes brought on by Covid-19.”

Support Services

 Costain – “Although the ongoing implications and impact of Covid-19 remain uncertain, we are pleased to be back working on site across substantially all of our operations. As a priority we continue to monitor and implement all necessary measures to safeguard our people and our stakeholders who are working on contracts across the UK. Our priorities remain their safety and wellbeing, doing the right thing for society, continuing to support our clients and protecting the financial strength of the Group.

Overall activity levels have increased since the beginning of the lockdown and have now stabilised. The activity levels vary across our sites as a result of the necessary Covid-19 safety measures implemented to protect our colleagues and our other stakeholders.

• The critical range of services to strategic highway, local authority clients and water utilities as well as our consultancy services across all our markets have continued to progress working to modified methods incorporating Covid-19 safety measures.

• Our on-site activities in London were more significantly impacted in order to ensure safe working conditions and travel, and current activity levels on these sites have stabilised and improved over the course of the second quarter.

• The overall level of activity in Q2 has been broadly as anticipated at the commencement of the lockdown in March and where necessary we are working with clients to change resource levels and programmes to meet their revised requirements as a result of Covid-19.

As previously announced, we have taken a number of actions to mitigate the immediate financial impact on the Group in Q2 through a combination of cost reduction measures and deferral of PAYE and VAT payments.

Successful fundraising and capital structure – On 29 May, Costain completed a £100 million capital raise which has significantly improved our financial position and provides us with a strong platform to capitalise on the opportunities resulting from the UK's positive infrastructure outlook. We are already benefitting from this improved financial position, with Costain winning a number of new contracts and framework awards since the fundraising was announced.

The Group has a net cash balance of £110 million, comprising £96 million of cash, £80 million share of cash in joint operations, and £66 million of drawn debt. In addition, the Group has £121 million of additional undrawn committed bank debt facilities available with a maturity date recently extended to 24 September 2023.”

 John Wood Group – “The safety of our people, clients and suppliers is our top priority. Since the start of April, we have had over 40,000 people successfully working remotely. Their effectiveness in delivering for customers is supporting

continued demand for our services and informs our cautious approach to plans for returning to the workplace. In addition, Wood employees continue to work safely at customer sites supporting vital services across the world.

Protecting margin: completed actions to deliver overhead reductions of >$200m in FY2020.

We have a proven track record of protecting margin by leveraging our flexible asset light model in response to changing market conditions. In the second quarter we have taken swift action to make significant adjustments to the overhead cost base in anticipation of reduced activity levels, and have accelerated the strategic margin improvement initiatives committed to in our Capital Markets presentation in November 2019.

With a focus on pace of delivery, we have completed the actions required to deliver overhead costs saving of over $200m for FY 2020. These early and decisive actions have allowed us to mitigate the impact of reduced activity. The full benefit will be recognised in H2 leading to a stronger second half margin performance. The actions taken include:

• Voluntary Salary Reductions. The Board, executive directors, senior leaders and others elected to take a temporary 10% reduction in base salary effective from 1 April for 9 months.

• Headcount reductions, temporary furloughing, reduced working hours, unpaid leave and operational salary reductions.

• Other overhead cost reductions including the stoppage of discretionary spend, travel costs and increased utilisation of shared service centres and high value engineering centres.

Continuing to win and execute work: H1 2020 trading performance – In the first half we have seen the effect on our business of the unprecedented events of Covid-19, its impact on the global economy, and significant levels of oil price volatility. This has reinforced our view that our strategy to substantially broaden our consulting, projects and operations business across diverse energy and built environment markets has been the right one. Around 85% of our business is energy related, of which c35% is upstream and midstream oil & gas, c25% is chemicals & downstream and c25% is renewables and other energy. The built environment market accounts for around 15% of activity.

On a like for like basis, adjusting for the disposals of the nuclear and industrial services businesses in Q1 2020, first half revenues will be down around 11% on H1 2019 demonstrating the resilience of demand for our services across a diverse market footprint. Reflecting the timing of macro challenges, the fall in H1 revenues was heavily weighted to the second quarter. Revenue in the second quarter is expected to be $2.0bn. First half revenue included increased renewables activity and relatively robust activity in chemicals & downstream and built environment markets. Adjusted EBITDA on a like for like basis will be down around 19% with margins down c70bps. This reflects the benefit of our actions to protect margins, together with the impact of cost overruns of on the legacy energy projects in ASA.

On a reported basis, revenue will be around $4.1bn, adjusted EBITDA will be around $295m to $305m and operating profit before exceptionals will be around $80m to $90m.

Asset Solutions Americas (‘ASA’) (c40% of H1 Revenue) – Revenues have remained relatively robust in H1, down c8% on H1 2019. This reflects continued strength in capital projects activity in chemicals & downstream as projects, including the YCI methanol plant and the GCGV plastics facility, continue to progress well. We are also seeing higher activity in solar and wind work. Market conditions in upstream and midstream work are challenging. Adjusted EBITDA margins will be down on H1 2019. This reflects lower activity generally and cost overruns of c$30m on the legacy energy projects from 2019 which we are progressing to completion, partially offset by overhead cost reductions.

Asset Solutions EAAA (‘AS EAAA’) (c30% of H1 Revenue) – Like for like revenue, adjusting for the disposal of the industrial services business, is down c11% on H1 2019. Robust activity levels on capital projects work in chemicals & downstream is being more than offset by lower levels of upstream oil & gas work. Adjusted EBITDA margins are in line with H1 2019 reflecting the benefits of swift action on utilisation and cost management in response to lower activity.

Technical Consulting Solutions (‘TCS’) (c30% of H1 Revenue) – In Q4 2019, the formation of TCS brought together the capabilities of STS and E&IS into a combined, more efficient, global and industry leading consulting offering. Like for like revenue, adjusting for the disposal of the nuclear business is down c15% on H1 2019. The reduction in revenues reflects the decision not to pursue higher risk and lower margin construction contracts and the expected roll off of automation work on TCO. Activity in the built environment market, which accounted for around 45% of revenues in the first half, was relatively resilient. Adjusted EBITDA margins are up on H1 2019 benefitting from our strategic margin focus and the synergy delivery initiatives which started in Q4 2019.

Strong balance sheet & liquidity – Wood has considerable financial headroom. Our financing facilities of over $3bn include bilateral term loans of $300m, a revolving credit facility of $1.75bn and US private placement debt of c$880m. The bilateral and revolving credit facilities have a maturity date of May 2022. The US private placement debt has a variety of maturity dates between 2021 and 2031 with first maturity of $77m in late 2021 and the majority weighted to later dates. Covenants are set at 3.5x pre-IFRS 16 EBITDA.

At 31 December 2019 net debt was $1.42bn (2.0x pre-IFRS 16 EBITDA). In the first half of 2020:

• The disposals of our nuclear and industrial services businesses generated proceeds of c$399m.

• The Board withdrew its recommendation to approve the final dividend of c$160m.

• The current trading environment presents inherent challenges to forecasting working capital movements and we are closely monitoring customer payments. As we set out in our previous guidance, we expect an unwind of advance payments and our typical H1 movement will result in a working capital outflow.

• Capex reductions in relation to ERP and other discretionary spend were implemented.

• Cash exceptional costs of c$55m were incurred relating to the actions taken to deliver overhead cost savings in response to market conditions, regulatory investigations and prior year onerous leases

Overall, we expect net debt3 at 30 June 2020 to reduce from the December 2019 position of $1.42bn.

FY 2020 Outlook – We are focused on protecting our margin in line with our strategic objectives by managing operational utilisation and delivering >$200m of overhead cost reductions to deliver significantly stronger second half margin performance.

Order book at the end of May was $7.0bn, down c11% since December 2019, of which c$3.5bn is due to be delivered in 2020. During April and May, we booked new orders of $1.3bn including; engineering, procurement and construction work for GSK, onshore wind and solar EPC awards in the US, EPCm to increase production of an oilfield in Iraq, and an LNG renewal in Asia Pacific. We also secured a five year framework agreement with the US Navy for engineering, design and maintenance of fuel installations.

Typically, around 80% of our full year revenues are either delivered or secured at this point in the year. However, in 2020 the risk of further delays and postponements persists and we are prepared for a wider range of outcomes depending on activity across our broad end markets. Our completed actions to protect margin give us confidence in delivering significantly stronger margins in the second half.”

Lifting restrictions

• Singapore has lifted restrictions further – Under Singapore’s ‘Phase 2’ non-essential retail stores, gyms and most businesses are allowed to re-open. Dine-in services in restaurants and cafes will also resume. However, gatherings of more than five people aren't permitted.

• In Wales, all non-essential shops can reopen from Monday, providing they follow social distancing rules. The housing market will begin to reopen – with viewings able to take place. Outdoor markets can also reopen, along with outdoor sports courts for non-contact sports, as well as places of worship for private prayer. Childcare facilities will begin to reopen on a phased basis.


• UK retail sales volumes rose 12% in May compared to April, according to the Office for National Statistics (ONS). Sales were still down by 13.1% on February. Non-food stores saw the biggest jump in sales - up 42%.

• Indian officials have re-imposed a lockdown in the southern city of Chennai and three neighbouring districts. Only essential services and neighbourhood grocery shops will be permitted to function under the 12-day lockdown, set to end on 30 June.

• California makes face masks compulsory – Under a new law passed on Thursday by Governor Gavin Newsom, residents have to mask up while in public or high-risk settings – including when shopping, on public transport or in medical care.

• Government borrowing hit a record monthly high of £55.2bn in May. April’s spending revised back the figure from £62bn to £48.5bn, according to data from the ONS. The borrowing raised total government debt to £1.95trn, exceeding the size of the economy for the first time since 1963.

• South Asian people are 20% more likely to die from coronavirus after being admitted to hospital in Great Britain, according to results from a major study published in the Lancet. Twenty-seven institutions across the UK, including

universities and public health bodies, as well as 260 hospitals, were involved in the study.

• The UK’s coronavirus alert level has been downgraded from 4 to 3, its chief medical officers have said. Under level three, the virus is considered to be ‘in general circulation’ and there could be a ‘gradual relaxation of restrictions’.

• The UK government has unveiled a list of guidelines for companies to follow, to ensure workplaces are prepared to welcome back their employees safely.

• The UK government has extended the protection for businesses renting from landlords (shops, pubs and restaurants) for non-payment of rent until September.

#corporate client of Peel Hunt