Coronavirus - Clearing the backlog

UK manufacturers remain under pressure despite the recent lifting of restrictions across the country.

A survey by the CBI found that 71% of respondents reported that orders were below expectations. Furthermore, manufacturers reported that stock remains higher than needed and expectations for output prices remain deflationary. Even with an instant bounce-back of economic activity, shutting down the nation will already have had unavoidable consequences and it will take time for these structural effects to unwind.


• Spain has lifted its state of emergency.

• South Korean auto exports fell 36.7% year on year.

• In Germany, the R0 rose to 2.88 on Sunday.

• UK Motor insurance claims rose by 35% in May vs April.

Company news

 Polar Capital– “In the closing weeks of our financial year to 31 March 2020, global equity markets entered a bear market, the quickest descent into a bear market on record bringing an abrupt end to the 11-year bull market, the longest on record. From a record high on 16 February 2020, it took just 16 trading days for the S&P500 to plunge over 20%. A perfect storm of weakening global demand as economies were placed in lockdown and a dramatic 47% plunge in the oil price as demand declined and failed talks between Saudi Arabia and Russia brought about an increase in supply. Volatility increased significantly during March and eased off by month-end, following a wave of monetary and fiscal stimulus initiatives. The VIX Index, the market fear gauge, started the year at 13.8, reached 40.1 by the end of February and surged to 82.7 mid-month before falling back to close the month at 53.6.

The scale of the monetary and fiscal policy response has been unprecedented. Since the beginning of the crisis the Federal Reserve launched a series of stimulus programs that outweigh anything attempted during the financial crisis, and over a much shorter period.

Following the massive stimulus and amid a sense that new case numbers were reducing in some parts of the world, global equities rallied in April and the MSCI All Country World Index gained 11%. The S&P500 surged 13%, closing out its best month since 1987, while the DJ Euro Stoxx 600 lagged, rising 6%. Clearly, investors were prepared to look beyond weak macroeconomic data as reported Covid-19 cases and deaths decelerated and massive intervention by central banks and governments mitigated the worst outcome in the near term.

Polar Capital has demonstrated pleasing operational resilience throughout this crisis. The lockdown and implementation of our Business Continuity Plan proved seamless and had no negative impact on our ability to manage our funds and service clients. We moved from an office in London with 147 staff to 147 decentralised offices each with one staff member. The health and wellbeing of our staff has been a priority during the lockdown period. I would like to thank all our staff for their diligence and hard work during this lockdown period working remotely.

This resilience has also resulted from the diversity of our highly specialist, actively managed sector, thematic and regional fund strategies. Sectors that have demonstrably outperformed during the crisis have been technology and healthcare. Polar Capital has deep experience and excellent long-term track records in both sectors.

The impact of the coronavirus has dominated all aspects of life, not least financial markets, but looking back to 2019, politics and central bank policy played a significant role in market behaviour. Governments were wrestling with trade disputes, of which the US-China discussions were the most prominent, elections in the UK and elsewhere threatened the status quo, and both fiscal and monetary policy makers were attempting to stimulate growth and inflation.

Equity markets traded broadly sideways for the first half of our financial year. While US economic conditions were on the whole favourable, due to solid job growth, rising wages and strong consumer activity, economic indicators were less positive in other parts of the world. UK investment was weak, in part as a result of Brexit uncertainty, and the German auto sector was under pressure.

The first calendar quarter of 2020 will be remembered for many exceptional characteristics, as it incorporated the fastest bear market in history. Other dubious accolades include the fact that March 2020 was the most volatile month ever, the best month ever for growth indices, and the worst for value. The UK mid cap index had its worst ever quarter and the US S&P 500 banks index sank to multi decade lows. Interestingly, March 2020 also registered a record for investment grade bond issuance.

At the time of writing, the financial market recovery perhaps paints an unrealistic picture of the challenges we all face; significant uncertainties remain. Governments and central banks have acted admirably quickly to limit the damage to economies and individuals' livelihood, but it is as yet unclear how consumers and businesses will respond when restrictions on movement are completely lifted.

Fund Performance and Fund Oversight – Persistently low interest rates and anaemic growth across much of the world have been influential in defining equity market leadership. With growth in short supply, those companies that can deliver above average growth have been rewarded.

Traditional value sectors have performed less well. These tend to be more economically sensitive, so have been disadvantaged by an environment in which confidence in economic growth is low.

Reflecting on fund performance in the year to 31 March 2020, our technology funds, managed by an experienced nine strong team, had a pleasing year. While the Global Technology fund and Polar Capital Technology Trust lagged the strong rise in their benchmark index in 2019, due to caution about the pace of advances in share prices, that caution stood them in good stead as investment conditions changed in the first quarter of 2020. The more recently launched Automation and Artificial Intelligence fund also outperformed, beating its benchmark by more than 11% in the year to end March 2020.

The Emerging Market Stars team also delivered returns in excess of benchmark for its broad EM, Asian and China funds. The flagship fund, Emerging Market Stars, was more than 10% ahead of benchmark over the year.

Our Global Insurance fund, managed by another established team with strong industry credentials, outperformed by over 5% in the year to end March 2020.

The Healthcare Opportunities fund underperformed in the 12 months to March 2020, although its longer-term track record remains in the top decile since inception.

In an environment where the divergence between the performance of growth and value became more pronounced, our value-oriented strategies had a tougher time in the year under review. The Europe ex-UK Income fund and Global Emerging Market Income fund both have a specific mandate which steers away from the higher growth, lower yielding areas of the market. Both underperformed their broad benchmark in the past year. The UK Value Opportunities strategy performed well at the end of 2019 as confidence in the UK economy began to return either side of the election, but March 2020 was a difficult month, with investors showing marked preference for the largest, most defensive names in the UK market. This left the fund 3% behind benchmark for the year.

The North American fund underperformed a market led by a small cohort of very large technology companies. The level of index concentration in the US is not unprecedented but it is a challenging backdrop for investors whose approach has a strong valuation component and incorporates smaller companies as well as market leaders.

Our three absolute return strategies experienced challenges in the quarter to end March, leaving all three in negative territory for the year. The Forager fund performed well in 2019, appreciating by 13%, but lost close to 15% in Q1 2020 as several of its larger long positions suffered. The Global Absolute Return fund run by our convertible bond team saw positive 2019 performance negated by Q1 2020 trading conditions; rapid spread widening in the high yield corporate bond market affected convertibles too. Since then the fund has had a good recovery.

The UK Absolute Equity fund, also up in calendar 2019, was on the wrong side of the sharp falls in equity markets in early 2020. Due to the ill health of the manager of this fund it was decided that it would be in the best interest of clients to suspend the fund and return capital to unit holders. I would like to take this opportunity to pay tribute to Guy Rushton, the manager, who passed away in May 2020, he was a passionate investor, a dear friend and will be sadly missed by everyone at Polar Capital.

While the month of March 2020 was challenging for performance, our funds performed very well on a relative and absolute basis in April and May 2020.

As at 29 May 2020, the Lipper percentile rankings for our UCITS fund range showed 70% of the AuM in the top quartile against peer group since inception, with 70% and 60% in the top quartile over five and three years respectively.

Despite the significant challenges presented by the coronavirus pandemic to our lives and the global economies, we have shown operational resilience to protect and support our people while they continue to provide good investment outcomes for clients. The longer-term impact on economic activity is unknown and continued volatility of markets will be a feature for some time. We believe that with our strong balance sheet, resilient operating platform and diverse range of specialist strategies, we are well positioned for the future.”


 Saga – “Market conditions continue to be challenging, in part due to Covid-19, with an easing of competitive conditions in February and March but with signs of a return to more competitive conditions in motor and home in the last month.

The Group continues to innovate its Insurance offering and has announced that treatment abroad for Covid-19 and repatriation to the UK has been included as standard as part of its travel insurance policies for all trips from 1 June. Saga has added the cover to help customers feel more comfortable travelling once the Government advice changes to say that it is safe to do so.

For the Insurance Underwriting business, reserve releases of £20m in the first four months of the year are ahead of expectations. This is due to favourable experience on large bodily injury claims relating to prior accident years.

Current year claims frequency from March onwards has been much reduced as a result of lower miles driven following the start of the Covid-19 lockdown. The Group has not recognised any Covid-19 related claims upside in current year results or financial projections.

Travel – The Group’s Travel business has remained on pause since the decision in mid-March to suspend operations due to Covid-19. The Group has been focused on ensuring customers whose holidays have been cancelled are re-booked on future trips or offered a cash refund. The Group continues to expect some travel to resume this year; retention levels continue to be high, particularly in Cruise, and a significant number of changes have been made to how the Travel businesses operate to provide peace of mind and ensure the safety of customers and colleagues.

As at 31 May the Group had cancelled all travel departures up to and including August and had refunded £44m of advance receipts to customers, mainly relating to the Tour Operations business.

For Cruise, customer loyalty has been exceptional. Advance receipts at the end of May were £43m, which is £5m lower than at the end of March but well ahead of expectations. The Group has retained over 70% of advance receipts on cancelled Cruise departures, and new bookings for next year have been very positive.

The sale of the Saga Sapphire was completed on 12 June on terms broadly in line with previous expectations and the latest indication for the Spirit of Adventure is that she will be delivered by the end of October.

The Group has been working with industry bodies and the Government to establish operational practices that would enable a return of operations in both Tour and Cruise businesses as the current restrictions are lifted. The Group's new mid-sized ships are ideally placed to offer 'safe sailing' and all these measures will be in place by the end of August.

Healthcare - The Group announced the sale of two domiciliary healthcare companies, Patricia Whites and Country Cousins, in March, and recently completed the transfer of Saga-branded healthcare customers and colleagues to a well regarded third party care provider for a nominal sum. This completes the exit from healthcare.

Group liquidity – The Group's liquidity position remains strong and benefits from diversified sources of income. At 31 May 2020, the Group held available cash balances, which exclude the Saga Tour CAA ring fenced group, of £30m and continued to have access to a further undrawn £50m on the Group's revolving credit facility. The available cash balances have reduced by £62m from £92m at 31 March 2020 due to £56m cash support to the Travel businesses, £7m restructuring costs and £7m interest payments, partially offset by cash inflow relating to the normal trading activity of the Group. The reduction in cash since the end of March is in line with the assumptions in Covid-19 stress tests.

The Saga Tour ring fenced group held £45m of cash at 31 May 2020, representing 87% of the £52m of advance customer receipts. In the last two months ST&H has returned around £28m of net cash to customers and has made trading payments of around £23m, offset by £41m of cash support from the Group.

The Group remains on track to receive regulatory approval for the sale of Bennetts Motorcycling Services in the next few weeks and to compete the transaction by 31 July 2020, generating net disposal proceeds of around £23m.

The Group has now signed an agreement for a debt holiday and covenant waiver for the two ship facilities. This allows the deferral of £32m principal payments that were due up to 31 March 2021. These deferred amounts will amortise over a four-year period. Interest remains payable and no dividends can be paid by Saga Group while these principal payments remain outstanding.

Costs and efficiency – As previously announced, the Group has successfully delivered £15m of run-rate cost savings during the period. The Group has continued this focus on efficiency, for example by enabling all colleagues to work from home, and now expects to achieve a further £5m of run-rate cost savings across the business.

As a result of the current period of travel suspension, the Group has undertaken a review of costs within the Travel business to reduce near-term marketing and other costs through the current period of disruption. This is expected to lead to a £20m in-year cost reduction over and above other savings and to reduce the combined cash 'burn' cost of the Tour and Cruise businesses to between £6m and £8m per month.

Outlook – The Group's near-term priorities are to preserve cash and reduce leverage, operating within amended banking covenants, and ensure our Travel businesses are ready to re-start operations as soon as restrictions lift. The Group will maintain the tight focus on costs and efficiency, while continuing the progress in Insurance that started last year, completing Cruise transformation and repositioning the Tour Operations business.

The Group remains able to resume traveling as soon as restrictions have been removed but has continued to run stress tests based on a wide range of outcomes for the Covid-19 crisis, including a further delay to the resumption of travel until next year. Based on this analysis the Group continues to expect to remain in compliance with key banking covenants at the next two half-yearly testing dates, although further actions may be needed to stay ahead given potential uncertain long-term impacts of Covid-19 on the business and the maturity of bank facilities in May 2022 and May 2023.

The Board of Directors and Executive team are encouraged by the progress made since the start of the year and by the resilience of the business through a time of unprecedented challenge and change. The current crisis highlights the strength of the Saga brand where the Group offers differentiated products and great customer service and against that backdrop the Board believes there is significant potential in the business that has not been fulfilled in recent years. An update on strategy will be provided with the interim results announcement.”


 JD Sports– “The Group can confirm that it has considered a number of strategic options for Go and that Go’s directors have lodged the Notice in Court. This Notice creates an immediate moratorium around the company and its property which lasts for ten business days. During this moratorium, Go’s creditors cannot take legal action or continue with any existing legal proceedings against the company without the Court’s permission.

Administrators have not yet been appointed and the Group will make no further comment at this time.”

Support Services

 GRC International – “Covid-19 Operational Performance – V-Shaped Recovery: Our pandemic response plan allowed for a substantial drop in revenue immediately following initiation of the UK-wide lockdown on 23 March. We assumed that April would be the nadir and we planned for a V-shaped recovery starting in May and continuing through Q2.

We are pleased to report that we are currently trading ahead of that plan. Billings are almost 20% ahead of management's expectations, costs have been carefully controlled and are as a result lower than anticipated and, as a consequence, our cash position is better than we allowed for. Website traffic and transaction volume both started a sustained rebound from April.

Business Adaptation: The Group has quickly adapted for the post-lock down environment.

The majority of our previously office-based staff in all our geographic locations are now permanently home-based.

Our classroom training business is now completely online, with a bio-secure training centre opening in Cambridgeshire with an innovative ‘Learn from Anywhere’ multi-channel delivery model.

We are successfully delivering 95% of our cyber security, privacy and continuity services remotely to customers across the world.

Since lockdown, the volume of contracts in our GRCI Law business has nearly doubled.

DQM's revenues have, in line with expectations, increased month-on-month through Q1.

Subscription products: The Group has continued investing in its growing range of subscription businesses. In particular:

We have licenced 8,700 new users on our e-Learning Staff Awareness platform.

We now have 13 documentation toolkits available on a subscription model. Sales recovered in May to the level they were at prior to lockdown.

We were appointed an IASME Certification Body for Cyber Essentials in late May and sales of this product range, which is sold on an annual subscription basis, are growing rapidly.

We continue to launch new content and module upgrades on the CyberComply risk and privacy management platform, sold by our Vigilant Software subsidiary.

Newly launched subscription products include a CREST-accredited Vulnerability Scanning service and, within DQM, the BreachTrak subscription service.

GRCI Law's Privacy-as-a-Service model, which has a strong annual retainer element, continues to see increasing uptake.”

 John Menzies– “As set out in its trading update of 27 March 2020 (the ‘March Trading Update’), the spread of Covid-19 has had a significant adverse impact on the Group’s financial performance. As expected, the very challenging conditions experienced from the end of the first quarter have continued during the second quarter to date, with the majority of customer flights grounded.

During April and May 2020, ground handling and fuelling activity was c75% lower than 2019, with the Group’s ancillary passenger airline services similarly affected. Cargo performance continues to be slightly more resilient overall with total volumes down c37% year on year in April. As a result of this substantial reduction in activity levels, revenues in April and into May were consistent with expectations at the time of the March Trading Update and c64% below budgeted levels.

Despite the significantly reduced revenue, strong cost management, together with quick and effective mitigating actions, resulted in an overall performance for April and into May that was better than expected at the time of the March Trading Update. We continue to tightly manage outstanding payments with our airline customers and are pleased that in the majority of cases payment terms continue to be adhered to. At this time, whilst we have been affected by the impact on our customers, we have not incurred any material bad debts during the current crisis.

Whilst the level of ongoing uncertainty is such that the Board does not consider it appropriate to provide financial guidance for the remainder of the current financial year at this time, the Group has been working closely with its customers on planning for forthcoming flight schedules. The Board currently expects activity levels witnessed in May to remain subdued into June, before a gradual return from early July.

As volume builds, we expect to see short haul capacity return first with long haul capacity taking longer to recover. In addition, we expect cargo revenues to continue to build back as customers employ more innovative measures to meet demand, such as using passenger aircraft for cargo only flights. Our freight forwarding business, AMI, continues to trade well and in line with 2019 performance, with a positive outlook for the coming months.

Funding position – During April and May, the Group has been cash generative as a result of unwinding its working capital and achieving good cash collection from customers, whilst also benefiting from reduced cash costs and the material benefits of government support and payroll schemes. These schemes covering many countries have helped to mitigate a large proportion of our direct payroll costs, the Group’s largest cost, accounting for in excess of 60% of our revenue.

Despite the impact of reduced revenues through the remainder of the year, the ongoing liquidity position will continue to benefit from the cost actions implemented as well as significant cash flow support from various government schemes in a number of territories. With the benefit of all the actions taken and the various government schemes, we expect our liquidity headroom to increase in the short term, peaking in excess of c£180m towards end of June against the Group's committed loan facilities. As volumes begin to grow from July, the Group will need to reinvest to build back up its working capital to prepare for a return to more normalised activity. However, after taking into account the benefit of the actions taken and support schemes, the Board believes that current available liquidity is capable of providing sufficient headroom under its current loan facilities for the Group through the remainder of the year and into 2021.

Mindful of the continued uncertainty, as well the negative impact of the crisis on earnings in the near term, the Board remains focused on ensuring the Group's financial position continues to be robust in all circumstances and will continue to review all options available as required to achieve this. The Group has maintained a close dialogue with its lending banks throughout the crisis and is in constructive discussions regarding a revised banking covenant structure that will be required for the remainder of 2020 and 2021. Further updates will be made as and when appropriate.

Summary – The Board recognises that there will be significant opportunities for aviation services groups who are able to emerge from this crisis with their capability and service offering preserved. We are pleased that our liquidity headroom is capable of providing a secure platform as we start to build back our operations. Overall, the Board is confident in the long-term growth potential of the aviation services market and believes that, as a global leader, John Menzies plc will emerge strongly from this challenging period.”


 Codemasters – “The Group has delivered FY20 revenue of £76.0 million, Adjusted EBITDA comfortably ahead of initial expectations at £18.2 million and profit before tax of £12.2 million. At the year end, the Group had net cash

of £24.8 million; cash of £25.6 million with £0.8 million of debt within SMS which is due for repayment in H1 of FY21. The results were delivered with just two titles being launched in the financial year: GRID and F1® 2019, along with the Game of the Year Edition of DiRT Rally 2.0 supported by the ongoing strength of our back catalogue of games and key partnerships. The increasing shift to digital, amplified at the end of the financial year by the outbreak of Covid-19, continues to improve margins. Digital sales represented 67.7% of the total sales in the year, up from 59.2% in FY19.

Strategy – The Group's immediate strategy remains as follows:

• strengthen Codemasters' overall leadership position in racing;

• grow the audience; and

• increase average revenue per user.

Significant strides were made during the past year with regards to each of these pillars, both through organic measures and through acquisition. The strategy remains based on the strength of the Group’s overall leadership in racing through the Group's proven expertise in this category and the quality of its AAA franchises. Through the strengthening of our portfolio, we are increasingly well positioned to take advantage of a strong growth market and the continued shift to digital distribution and post launch services. Other opportunities include increasing the Group's penetration into existing and new markets, as well as the new opportunities from Next Gen consoles and streaming platforms. A broader IP portfolio allows us to further establish the Codemasters brand as the go to racing channel for both gamers and licensors hence raising competitive barriers to entry.

Share Placings and Acquisition – At the start of the financial year, Reliance Big Entertainment, owners of the Company prior to IPO, held 29.5% of the equity. Through placings in June and November 2019 we were able to welcome new institutional shareholders to the register whilst providing Reliance with a highly satisfactory exit and thus ending our nine-year relationship with them. An issue of additional ordinary shares, raising approximately £20 million before expenses, took place in November 2019 to finance the initial cash consideration for the acquisition of Slightly Mad Studios (‘SMS’). On behalf of the Board, I would like to thank all of our shareholders, past and present, for their support.

The addition of Slightly Mad Studios was an exciting development for the Company, bringing diversified revenue streams through additional proven owned IP Project Cars, access to a licenced blockbuster movie game with the launch of the Fast & Furious Crossroads title confirmed for release on 7 August 2020, and the addition of over 150 product developers. The acquisition helped cement our leadership in the racing category and is expected to deliver adjusted earnings per share enhancement of circa 30% in FY21, being the first full year of ownership.

Covid-19 and People – Since the outbreak of the Covid-19 pandemic our focus has been on the health and safety of our employees and I am pleased to say that we were able to act swiftly and in line with guidance to enable remote working throughout the organisation. This has been helped by the fact that SMS has always adopted a fully remote workforce. It is a great credit to all of our staff that we experienced negligible operational disruption and that they have adapted to the current environment with the utmost professionalism.

Outlook – The gaming sector is in the midst of significant change, driven by the continual shift to digital distribution and the vast opportunities arising as a result of esports, Games as a Service, the launch of Sony's and Microsoft's next generation consoles, and the emerging streaming platforms such as Google Stadia. Codemasters is well placed to take advantage of this growing market, due to its diverse racing game portfolio and associated revenue streams, key partnerships and the ongoing strength of its back catalogue. As we look ahead, I am confident that we will be able to deliver on our ambitious growth strategy and strengthen our position as a world-leader in the development of premium racing games. Signing the prestigious FIA World Rally Championship license in May 2020 continues to reinforce the company's position as the preferred destination for the world's most successful racing licenses.”

Lifting restrictions

• Today, New York is preparing to further lift its restrictions as it enters the second phase of its four-phase easing plan and reopens a number of facilities. Restaurants are allowed to reopen, although only at outdoor tables.

• Dubai will open up to tourists from 7 July. From tomorrow, nationals and residents will be allowed to travel outside the country with fewer restrictions. They will need to complete a health declaration form and be free of Covid-19 symptoms on departure and take a coronavirus test on their return, with two weeks’ quarantine for those who test positive.


• South Korea’s fifth-largest city, Daejeon, is going back to stricter social distancing measures after clusters of coronavirus cases. All gatherings in public spaces such as museums, sports halls and libraries have been banned. Twenty-two churches used by the Christian sect, the Shincheonji Church of Jesus, have also been closed.

• In France, going to school is now compulsory from Monday for everyone up to the age of 15. Schools have been open for several weeks, but only on a voluntary basis.

• New Zealand has said it is extending its ban on cruise ships arriving in the country. The current cruise ship ban was due to expire on 30 June.

• In Germany, the R0 rose to 2.88 on Sunday, according to the daily estimate published by the country’s public health agency, the Robert Koch Institute (RKI). It should be noted that this value is calculated off a low base, hence the sharp rise and most of the new cases have been attributed to a single outbreak at a meat processing facility.

• Spain has lifted its state of emergency, reopening its borders to visitors from most of Europe and allowing British tourists in without having to quarantine.

• Police reinforcements have been sent to maintain a coronavirus quarantine on a tower block in the German city of Göttingen after violence on Saturday. Seven-hundred people were placed in quarantine on Thursday after two residents tested positive.

• UK manufacturers remained in a deep downturn in early June, despite improvement since lockdown measures were relaxed, as export orders fell to the lowest on record. A survey run by the CBI found that 71% of respondents reported that orders had been below levels of prior years and 81 per cent reported the same for export orders.

• China’s customs authority has stopped shipments from a Tyson Foods chicken plant in the US after a coronavirus outbreak affected workers there.

• Australian authorities have extended a state of emergency in Victoria after a spike in the city of Melbourne.

• South Korean auto exports fell 36.7 per cent compared to the same period a year ago, according to the Korea Customs Service.

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