Coronavirus - Crunching the numbers

The UK chancellor Rishi Sunak today announced the government’s plan for weaning businesses off the – ever more costly – furlough scheme.

Business owners will now need to consider whether to pay 5% of furloughed wages in August, 15% in September and 24% in October, followed by a minimum of £520 per month from November, to get a £1,000 one-off bonus in January. Clearly the level of take up will depend on the recovery in sales. Cuts to VAT, stamp duty and 50% off meals in August should stimulate demand by encouraging the public to go out and spend.


• VAT in the UK reduced from 20% to 5%.

• Stamp duty holiday on the first £500,000.

• EC strikes deals with Roche & Merck for Covid-19 treatments.

• Hillingdon hospital in London closed after outbreak.

• 50% meal discounts in participating UK restaurants.

Company news

Buildings & Construction

 Springfield Properties – “As previously announced, Springfield entered the second half of 2019/20 with a strong order book of contracted revenue for the period to 31 May 2020 and was experiencing good growth across the business prior to the Covid-19 outbreak. However, as a result of the lockdown, Springfield was unable to complete the delivery of homes scheduled to take place in April and May 2020, which for the previous two years accounted for 30% of annual revenue. As a consequence, the majority of private completions anticipated for Q4 2019/2020 were postponed into the new financial year. Notwithstanding the lack of sales in the last two months of the year, the group was able to achieve the same level of revenue in affordable housing as the prior year. Overall, the group now expects to report revenue for full year 2019/20 of approximately £144m (2018/19: £190.8m). The group is pleased to note that it expects to report an improvement in gross margin for 2019/20 over the prior year and profit before tax of at least £9m (2018/19: £16.0m).

The group recommenced operations on site from 15 June 2020 and construction activity has now resumed on every site, along with all sales offices reopening on 29 June 2020, with Covid-19 safe-working protocols in place. The number of reservations received in the first week following the reopening was the highest number of reservations Springfield has ever recorded in a one-week period – and substantially higher than normal for this time of year. The group has also commenced handing over homes that were nearing completion prior to lockdown. As a result, the group expects Q1 2020/21 sales to be significantly higher than the equivalent period last year.

In addition to the recent reservations, Springfield’s order book of contracted revenue currently stands at over £110m. This includes £44m of largely constructed private housing, much of which was due to be handed over to clients in April and May 2020. These homes are contracted under the Scottish missive system and the group has only had one cancellation since lockdown. The affordable housing element consists of £66m from construction contracts already underway.

Whilst the group anticipates robust sales for Q1 2020/21, and is experiencing a strong increase in demand, performance for the remainder of the year is reliant upon operations remaining open with no further Covid-19 disruption.

The group has maintained a robust financial position throughout the pandemic. Springfield has a total credit facility of £85m and net debt at 7 July 2020 amounted to £69.4m. Of the total credit facility, the £18m that was secured in April 2020 has been fully drawn, but is not currently being utilised. With operations having recommenced, the group delivering against a strong order book for near-term revenue as well as experiencing significant customer demand, management anticipates a reduction in the net debt position.”


 Victrex – “Overall, Q3 group sales volume was down 12% to 805 tonnes (Q3 2019: 912 tonnes), with group revenue down 18% to £58.8m (Q3 2019: £72.0m) reflecting mix as a key driver. On a year to date basis, (to the end of Q3) group sales volume of 2,797 tonnes is broadly in line with the prior year

(2019 YTD: 2,811 tonnes), with YTD group revenue of £210.3m down 3% (YTD 2019: £217.8m).

Following a broadly stable performance in April, the months of May and June started to see the impact of Covid-19 related headwinds, with group volume and revenue being more than 20% lower than the prior year. Aerospace, Automotive and Energy end-markets experienced the greatest level of decline, with performance being moderately weaker than market indicators. In Medical, the anticipated deferral of elective procedures started to impact us from April, with monthly revenue declines of up to 40% in this division, although market indicators suggest procedure deferral will gradually reverse. Pleasingly, the gradual return of some elective surgeries in Asia and continued growth in non-Spine has kept year-to-date Medical revenues ahead of the prior year in that region.

Financial position and cost management – Our net cash position at 30 June 2020 was slightly ahead of our expectations at £72m, which includes approximately £8m ring-fenced for our China manufacturing subsidiary. The group has an undrawn and committed RCF of £20m, together with a £20m accordion facility.

The group is also reflecting the weaker demand outlook through the remainder of FY 2020 and into H1 2021, as well as the ongoing impact of under-absorption of fixed costs, by reviewing additional cost actions, to support profitability in a lower production environment.

As previously communicated, we will assess macro and end market conditions later in the year, and the outlook for FY 2021, before making a declaration on dividends for FY 2020.

Outlook - With an additional impact in our current and forward order book from Covid-19-related headwinds, and with macro and end market uncertainty, as previously communicated, we are unable to provide detailed guidance on full year expectations.

With lower production levels reflecting weaker demand and planned inventory reduction, and consequently the under-absorption of fixed costs, together with a weaker mix, margin is anticipated to be further impacted in the second half and into FY 2021. Whilst market indicators may remain negative across many of our end-markets as we move into our next financial year, we anticipate being in a better position later in the year to assess the outlook.

Our focus continues to be on the safety, health and well-being of our employees, delivering good customer service and managing our costs. Whilst we have already carried out a number of cash conservation measures, further actions are being considered should there be a sustained downturn. Overall, with sustainable products, our range of medium to long term growth opportunities remain strong, our financial position is robust and our cash generation capabilities offer the opportunity of good medium term returns to shareholders.”

Real Estate

• CLS Holdings – “The group’s rental income in the UK and France is due on a quarterly basis, with the current payment due between 24 June and 1 July. In Germany, rents are due monthly and the current payment was due on 3 July. As at 30 June 2020, the group’s contractual rents are split 52% in the UK, 33% in Germany and 15% in France.

By close on 7 July 2020, we had received 86% of contractual rents due or 93% taking into account those tenants we are supporting by switching to monthly rents (2019: 96% of rents had been collected by 7 July 2019).

Update on first half 2020 rent collections

In the first quarter we collected 99% of rents due and in the second quarter we have, by 7 July 2020, collected 96% of the rent due.

Overall, for the first half of 2020 we had received 98% of contractual rents due by 7 July 2020 (2019: 97% of rents had been collected by 7 July 2019).”

 Regional REIT# – “Further to the 21 May 2020 announcement, Q1 rent collection has continued to increase to 96.7% from 93.9%. This comprises 95.0% of Q1 rent paid and agreed collection plans with occupiers amounting to 1.7%. We anticipate collecting additional Q1 rent in due course.

As at 6 July 2020, an encouraging 78.5% of the rent due had already been collected for Q2 or a payment plan has been agreed and is in place. Furthermore, at this point we are in discussion with an additional 12.6% of occupiers by income, and an update will be provided in due course. Therefore, it is expected that the rental collection amount will rise. As announced on 21 May 2020, when considering the Q2 dividend the Board will have regard to the financial position of the group, including the level of rental income received. The Q2 dividend is expected to be announced on 26 August 2020.”

 Segro – “As at 7 July 2020, we had received 93% of the £37m of rent which was due on the UK quarterly payment date after adjusting for re-profiled rent agreed with customers.

We continue to work proactively and constructively to support customers impacted by the Covid-19 pandemic on a case-by-case basis. As a result, £9m of rent ordinarily due on the UK quarterly payment date has been re-profiled, mostly to be paid in the second half of 2020.

With regard to payments for the second quarter of 2020 across our UK and Continental European portfolio, as at 30 June 2020, 98% of the £88m rent due has been paid after adjusting for re-profiled rent agreed with customers (£13m). 2% of the rent due (approximately £1.5m) remains to be paid.”

 Tritax Big Box REIT – “We expect that 97% of Q3 2020 rents will be collected by the end of August 2020 comprised of the following: • 84% of rents have been paid to date

• 13% is scheduled to be collected on a monthly basis over the remainder of the quarter

• For 3% of rents, we are in discussions with a small number of tenants over deferral of rental payments in support of their short-term cash flows during the Covid-19 pandemic

In line with our expectations outlined in our April 2020 trading update, 96% of Q2 2020 rent was paid within the respective quarter. Of the 4% of Q2 2020 rent not paid within the period, we expect 1% to be paid imminently and the remaining 3% to be collected over 2020/21.

To date, no rent-free periods or rent reductions have been agreed across the portfolio.”

 Unite Group – “Reservations across the group for the 2020/21 academic year are currently at 81% (2019/20: 90%), reflecting delays by some students and

Universities in making their accommodation choices at this stage. We expect a higher than usual volume of sales activity later in the booking cycle.

We are targeting 90% occupancy for 2020/21 (2019/20: 98%), underpinned by the income security provided by our multi-year nomination agreements. Overall, we expect a 10-20% reduction in rental income for 2020/21 compared to 2019/20 (prior to the impact of cancellations in 2019/20 due to Covid-19).

HE sector update – Most undergraduate applicants have now chosen their preferred University for 2020/21, following the 18 June deadline for accepting an offer. UCAS data showed a 1% increase in the number of applicants with an offer to start University this Autumn compared to 2019/20. This reflects a 3% increase in acceptances by UK 18-year olds as increased participation rates more than offset the impact of fewer young people in the population.

The number of students with a deferred start date was down 1% compared to 2019/20 as of 18 June, reflecting the clear desire of young people to attend University, weaker employment prospects and fewer gap year opportunities for school leavers.”

Support Services

 Marlowe – “Whilst we have seen some disruption from Covid-19. which affected the early part of our new financial year, the impact has been manageable and, given the regulations that govern the requirement for our essential services, our business model has demonstrated resilience and presented opportunities for new service offerings.

We believe that the crisis will lead to favourable structural trends resulting in an increased focus on the health, safety, wellbeing & compliance markets that we occupy. We see an increased level of attractive opportunities to consolidate our markets through further acquisitions to accelerate our growth, and we are well-placed to act on these following our recent oversubscribed placing.

Given the defensive nature of our business model, we expect to see growth in line with our pre Covid-19 expectations as restrictions are lifted. Covid-19 is no longer having a significant impact on our operations and we expect to deliver further good progress in the current year.”


 Craneware# – “The Company has continued to make progress on its long-term strategic aim to become ubiquitous in US Hospitals, as the intelligence layer sitting across all other systems, delivering the information required to improve financial and operational performance. The financial challenges hospitals are currently facing, combined with the ongoing transition to value-based reimbursement, means the impact and insights the Trisus platform delivers to our customers are increasingly relevant. The global pandemic has highlighted the importance of usable financial and operational data and we believe this realisation will drive further investment by hospitals in the future.

While the situation has eased in some areas, many healthcare providers continue to be under considerable pressure and this situation is likely to continue. Our customers continue to take steps to create further resilience across their financial operations and we are committed to partnering with them by providing the tools, regulatory information and data to enable them to do so. The Craneware data team is continuously monitoring guidance regarding billing and coding for Covid-19 testing and treatment and publishing in-depth regulatory bulletins, available to both customers and non-customers. Our free-to-attend Covid-19 webinars have had record levels of attendees, demonstrating the need across the market for this insight and guidance.

The Company continues to benefit from high levels of recurring revenue, accounting for approximately 85% of revenues in any year. We enter the new financial year with an annuity revenue base of over $65m. We continue to have sales discussions with hospitals across the US and are cautiously optimistic we are seeing the first signs of sales cycles slowly normalising; however, we remain cognisant of the ongoing macro uncertainties.”

 First Derivatives – “Total revenue was 6% ahead of the prior year period, reflecting the group’s resilience during a period impacted by Covid-19 across our operations. Managed services and consulting revenue was up 2% on the prior year period as we continued to benefit from the high visibility and repeat nature of our client engagements. As expected there has been some deferral of new project engagements, the financial impact of which to date has been partially mitigated by lower recruitment and cost management.”


 FirstGroup – “Divisional summary

First Student: strong contract retention through excellent customer service, positive pricing and acquisitions underpin market leadership position; despite cost headwinds well positioned to restart at the appropriate time for each of our schools with conversations underway about how and when that will be.

First Transit: positive pricing, new contracts, and cost actions only partially offset a number of cost headwinds during the year. Pace of restoration of service will vary by business line but starting to see increases in activity being directed by our transit authority customers.

Greyhound: Coronavirus compounded a challenging year with lower immigration-related demand, competition and lower fuel prices resulting in like-for-like revenue reductions of -5.3% and an adjusted operating loss in the year; government grants for our national network provide a framework from which to build our timetables back up as passenger demand justifies.

First Bus: like-for-like passenger revenue +0.7% reflects the previously reported poor weather in H1 and the coronavirus outbreak. Fuel and other inflationary pressures during the year were partially offset by initial benefits of cost efficiency programme; new government ‘Restart’ grants in place to enable increased service capacity while maintaining social distancing.

First Rail: like-for-like passenger revenue +0.2%. Strong GWR performance and successful start-up of the West Coast Partnership’s new Avanti franchise were offset by previously reported challenges in TPE and SWR. Secured GWR contract from April 2020 until at least 2023. All franchises underpinned by Emergency Measures Agreements with UK government until at least September.

Current trading and outlook

Government and societal responses to the pandemic have had a significant impact on all of our markets, and will continue to do so for some time to come. Travel volumes have reduced very substantially and while guidance to limit travel and socially distance remains in place, this will have a significant impact on our service capacity and financial performance.

At the same time, governments and customers recognise the need to maintain our transport services and are enabling this through fiscal, contractual and other support.

There are material uncertainties as to how rapidly demand will increase, the rate at which fiscal support tapers and the duration of social distancing rules, as well as the timing of North American schools reopening. Therefore it is currently not possible to provide guidance for the financial year to 31 March 2021.

While the group currently has material fiscal and contractual support for running essential services across the divisions during the pandemic and committed undrawn liquidity of c.£850m as at the end of June, there are material uncertainties as to the future consequences of the coronavirus pandemic. The potential impact of certain scenarios have been highlighted in the going concern statement on page 23.

However, based on current government and customer measures, and the cost reductions made in response to lower demand, the Group delivered adjusted operating profit and positive cash from operations before capital expenditure since the start of the current financial year. Recognising the usual seasonality of our First Student business over the school summer holiday period, we would expect this relatively resilient financial performance to persist while these arrangements remain in place.

Going concern assessment (page 23)

The Directors used the financial forecasts prepared for business modelling and liquidity purposes, as the basis for their assessment of the group’s ability to continue as a going concern for the 12 months from the date of the financial statements. Those forecasts were prepared using ‘bottom up’ Divisional projections which were then subject to a series of Executive Management reviews and subject to a group risk overlay to produce a risked outlook. This risked outlook formed the base case, which was overlaid with a reasonable downside scenario in order to stress test the adequacy of facility headroom and provide assurance in relation to the risk of breaching financial covenants.

The major assumptions and key areas of judgement taken into account in the modelling included:

• the likelihood of coronavirus restrictions in the UK and North America remaining in place for the balance of the fiscal year;

• the possible continuation of Rail Emergency Measures Agreement support beyond September 2020;

• a possible further extension of the CBSSG Restart regime in Bus;

• the potential impacts on financial and trading performance without current levels of customer and government support currently being provided;

• whether covenant waivers will be required under the group’s banking facilities;

• the timing of working capital flows;

• the ongoing availability of bank finance facilities, including the Bank of England CCFF; and

• the impact on the triennial valuations for UK pensions that were completed in 2019.

The risked outlook used for assessing going concern assumes continued fiscal and contractual support broadly at the levels currently in place and the businesses starting a gradual return to pre-crisis levels during the second half of the financial year. Given the extent to which that fiscal and contractual measures underpins the businesses to support current levels of passenger demand under social distancing and the fact that that support is being provided by governments and contract partners to allow the group to continue to run the diverse essential services, it was not felt necessary to run alternative reverse stress tests.

Base Case: The key assumptions used in the Base Case were:

• First Student: All schools return in August 2020 at normal operational levels, but with Charter recovering fully by April 2021.

• First Transit: All segments substantially back to normal operational levels by September 2020.

• Greyhound: Passenger volumes remain subdued until October 2020, improving gradually thereafter and to near pre-crisis levels by March 2022. Operated miles increase broadly in line with increased demand. Fiscal support until January 2021.

• First Bus: Operated miles increase significantly with CBSSG Restart support, but that support assumed to cease in March 2021 with network miles dropping back to circa 70-80% of pre-crisis levels in FY21/22.

• First Rail: All franchised TOCs continue under management contract for the life of the existing franchise agreements. Hull Trains recommences operations in September 2020.

• Brexit: Projections assume UK operates in a post-Brexit, post-crisis economy with consensus macro-economic outlook in accordance with HM Treasury Economic Forecast of April 2020.

• UK Pensions: the agreed deficit repair commitments relating to the 2019 triennial valuations continue to be made as planned.

Reasonable downside scenario: This assumed a delayed operational restart in North America / part repayment of Rail ring-fenced cash. The key underlying assumptions used in this case were:

• First Student: significant proportion of schools do not restart until January 2021 (but capex kept at the same as Base Case levels).

• First Transit: University start delayed to January and slower recovery in Paratransit.

• Greyhound: Slower passenger volume/yield recovery during FY22. Lower than anticipated 5311(f) CARES Act funding received.

• First Bus: as Base Case.

• First Rail: Ring-fenced cash reduced by £200m at September 2020 and continues at this lower level.

As noted on page 4, it remains the group’s core strategic aim to complete the disposal of First Student and First Transit at the earliest appropriate opportunity. However, for the purpose of going concern testing, the disposal is assumed not to complete in the going concern period. Should the disposals complete in this period, the likely sales proceeds would allow the full repayment of all debt at that point. Nevertheless, should the disposals not be completed by March 2022, for viability testing purposes the Base Case in the years beyond the going concern period includes a number of potential refinancing options to replace maturing drawn facilities, including a £400m bond, a £150m equity raise, and £300m USPP and/or bank debt, that might be required in those year.”

Lifting restrictions

• Gatherings of up to 100 people are now allowed in Denmark, as the country further eases its restrictions.


• France’s Prime Minister Jean Castex has warned that a new major outbreak in the country could prove irreversibly damaging. He added that any further measures to control the spread of Covid-19 would need to be balanced against the impact on the economy and what the French people can cope with.

• The French National Institute of Statistics and Economic Study (INSEE) estimates the French economy will contract 9% over the year. While this still represents a significant recession, it is an improvement on the 11% decline forecast in the government’s revised 2020 budget.

• Cricket’s first test match in four months begins today, when England take on West Indies in Southampton. The five-day game will have no fans present, English umpires instead of overseas umpires, and players are banned from using saliva on the ball.

• Thousands of protesters have clashed with riot police in the Serbian capital, Belgrade, after the government announced a weekend curfew in the city in response to a rise in coronavirus infections.

• The WHO now says there is evidence to suggest the virus can spread in the air, rather than just in droplets.

• The US has formally begun the process of leaving the World Health Organization. The US will withdraw on 6 July 2021.

• Hillingdon Hospital in Uxbridge, west London, has closed to emergencies after an outbreak of coronavirus. Seventy members of staff went into isolation on Tuesday, including a number who tested positive for Covid-19. The outbreak was declared on Friday.

• The ONS has revealed 46% of all UK employees worked from home in April.

• Colombia is extending its nationwide lockdown by more than two weeks after reported cases and deaths accelerated in several cities, President Iván Duque has said. The measure, which was implemented in March, was due to be lifted on 15 July, but has now been pushed back to 1 August.

• The Netherlands shut its borders to people from Serbia and Montenegro again today, a week after opening them, citing a rapid rise in coronavirus infections in both countries.

#corporate client of Peel Hunt