Coronavirus - Eyes wide open

Beijing and Chennai have today responded to new outbreaks of the virus by reimposing lockdown restrictions, and in Berlin an apartment block has been quarantined.

It looks more and more likely that small outbreaks will be unavoidable. However, authorities now know the severity of the virus and what they are looking for, so their attitudes will no longer be as complacent. This should lead to quicker, bolder and more targeted actions, giving hope that a second wave will be more gentle ripples rather than a tsunami.


• UK has commissioned a review of the 2m social distancing rule.

• France to re-open its EU borders.

• Beijing identifies a local outbreak.

• Masks must be worn on all UK public transport.

• Denmark gives cash hand out to some citizens

Company news

Buildings & Construction

 MJ Gleeson – “The Company announced on 14 May 2020 that it would begin to implement its plan for a phased restart of activity on sites. Sites are re-opening as planned and customer demand is recovering strongly.

Of our 67 build sites 62 have so far re-opened and construction activity has recommenced on 43 sites with activity initially focussed on preparing site infrastructure and ground-level works. Plot build activity is recommencing in a phased and controlled manner. By the end of this month, plot build activity will have recommenced on the majority of sites.

Current safe-working protocols are, as expected, having an impact on productivity and build rate. However, we believe there is scope to improve productivity and build rate by the introduction of new working practices within the Covid-19 Secure protocols.

Sales offices and show homes have reopened on 40 sites and will reopen on a further 15 sites by the end of this month. Virtual show home tours have been launched on the Company's website and the Gleeson Key Worker Priority Programme launched in May 2020 is generating strong interest.

Reservation levels, which had, in the past months, fallen to 25% of pre-Covid levels, have increased significantly in the last two weeks with reservations at 70% of pre-Covid levels. We continue to see price increases being achieved on newly released plots for sale on most sites and incentives remaining low. We have not experienced any impact on lender valuations.

The Company enabled 43 customers to complete their purchase and move into their homes during April and May bringing year to date sales to 1,037 homes by 31 May 2020. Completions are expected to continue at a similar pace during June.

To date, the Company has brought back from furlough 275 of the 456 staff furloughed in April. In total, 30% of staff remain furloughed but the Company expects that all staff will have returned to work by 30 July 2020.

The Board, therefore, expects group revenue for FY2020 will be circa £145m (FY2019: £249.9m).

The forward order book for sales in the next financial year currently stands at £135.2m on 940 plots (30 June 2019: £87.6m on 677 plots).

Pre Covid-19, the Company had planned to open 17 new sites during the final quarter of this financial year. Three new sites have been opened and a further site is expected to open in the next two weeks bringing the total number of build sites to 71 by 30 June 2020 (30 June 2019: 69 build sites).”

 Travis Perkins – “Over the last six weeks, the Group has continued to open more of its branches under the safe, social-distancing working practices we have developed in conjunction with customers, suppliers and construction industry bodies, as well as the UK Government.

Group volumes in May were around 60% of prior year with an improving trend throughout the month. The Group's weekly volume run rate is now around 85-90% of prior year with particular strength in Wickes' core DIY ranges and in Toolstation, with both businesses demonstrating improving like-for-like growth versus 2019, with performance underpinned by their strong digital capabilities.

Across the Merchanting and Plumbing & Heating businesses, volumes are now around 80% of prior year with more marked differences between the businesses depending on the customer category mix and also with some regional variations. The General Merchanting business is operating well, whereas trading in Plumbing & Heating is recovering more slowly as a greater proportion of plumbing work requires tradesmen to work in people's homes.

However, while there has been a significant recovery in trading volumes in recent weeks, it is evident that the UK is facing a recession and this will have a corresponding impact on the demand for building materials during 2020 and 2021.

Business restructuring – Throughout the Covid-19 crisis, the safety of colleagues and customers has been of paramount importance, with the closure, re-opening and operation of branches focused on maintaining a safe approach to trading. The Group has used Government schemes appropriately to protect employment during the lockdown period, giving time to make an initial assessment of the level of recovery of the trading environment as the lockdown eases.

Reflecting the challenging outlook for our end-markets, the Group is taking regrettable but necessary actions to preserve the future competitiveness of the business.

Following discussions with colleagues this morning, the Group has commenced a consultation process regarding the closure of around 165 branches across the overall branch estate, representing approximately 8% of the Group's network. In addition, the Group is consulting on above-branch roles in the distribution, administrative and sales functions. In total, the Group expects to reduce the number of colleagues by around 2,500 or approximately 9% of the workforce.

Branch closures will be concentrated in the Merchant businesses, in particular the Travis Perkins General Merchant, focusing on small branches where it is either difficult to implement safe distancing practices, or where marginal profitability will be eroded in a reduced volume environment.

Strong cash management to maintain a robust financial position – The Group continues to maintain a strong liquidity headroom position with a robust balance sheet. Actions to reduce the monthly operational cash burn rate and to carefully manage working capital have continued. Customer collections remain robust, enabling the Group to maintain its committed payments to suppliers throughout the crisis period, whilst also preserving a strong liquidity position. At 12 June, the Group had cash deposits of £363m, and taken together with the undrawn £400m Revolving Credit Facility, overall liquidity headroom of £763m.

The Group continues to work closely with its relationship banking syndicate. Despite the strong liquidity position, given the impact of the Covid-19 crisis and the resulting lockdown period on the Group's income statement for 2020, the Group has taken the prudent step to agree a relaxation of the covenants for the test dates at the end of June and December 2020.

• The interest cover covenant has been waived for both June and December 2020

• The net leverage covenant has been relaxed to 3.5x for June 2020

• The net leverage covenant has been waived for December 2020

• A minimum liquidity headroom covenant has been established for September and December 2020

Interim results announcement – Due to the ongoing uncertainty caused by the Covid-19 pandemic, the Group has decided to publish its interim results in early September.”


 Collagen Solutions – “Since the Company's trading update announcement on 23 April 2020, the Company is performing in line with its expectations in the current environment and the Board is encouraged about the year ahead. Whilst Covid-19 has resulted in certain operational challenges with logistics and abattoir production in Australia and New Zealand, in addition to capacity constraints and production challenges in the Company's Glasgow plant, the

Company's order book across its entire business continues to be strong and it has not seen a decrease in demand for its products and services. As at 8 June 2020, the Company has orders or contracted development milestones for FY 2021, together with revenue already recognised through the first two months of the financial year, worth approximately £3.3m (i.e. 82% of FY 2020 revenue) and have further visibility on contracted development milestones which should further add to its order book.

The primary end-markets that the Company addresses are orthopaedics, cardiovascular, wound care, and dental surgery. Whilst the Company is aware that many of its customers who directly serve these end-markets have been impacted by the reduction of non-emergency or elective procedure volumes, the Company has not seen a corresponding decrease in demand for its services or biomaterials products thus far in FY 2021, and the Company's customers have continued to place orders in the normal course of business. The Company believes the underlying clinical demand for its products in these end-markets remain strong in the medium-to-long term.

The Group has completed a £0.5m investment in the Glasgow facility that increases the manufacturing capacity by at least 85% with further capacity increases deliverable through manufacturing process improvements, which will allow the Company to work through its backlog and order book. This investment in additional capacity and people has already improved manufacturing clean room uptime resulting in more efficient and consistent manufacturing operations. The Company expects the substantial completions of validations in Q1 of FY 2021 and the UK relaxation of current health and safety restrictions to enable full capacity to be achieved during Q2 FY 2021, and is confident that it will meet its customer orders through FY 2021 and fulfil its strong order book

Liquidity and cash profile – As announced on 23 April 2020, the Company proactively put in place a number of prudent cash-conserving measures including non-executive Board and executive team pay cuts to help mitigate cash burn and minimize employee furloughs and job cuts. The Company also accessed various Covid-19 related government funding schemes (combined £0.2m). The Company is also in advanced discussions with Norgine Ventures (the Company's current debt provider) with respect to an amendment of its current facility arrangements to extend the runway on the related capital repayments.

In addition to the above, the Company has recently received notice of formal variation to the Scottish Enterprise Grant of £1.54m awarded in November 2018 to fund specific and existing customer focused R&D programmes and projects. The Company has not yet claimed against these non-dilutive funds, however an initial claim for funds spent over the period from November 2018 to date will be submitted in June 2020, which is estimated to be approximately £0.4m. Claims thereafter will be submitted over the 36 months duration of the grant to ensure that the Company can access as much of the funding available as possible to continue to grow its presence and economic contribution to Life Sciences in Scotland.

The Company will continue to prioritise liquidity and the preservation of cash to enhance its financial position in response to Covid-19 and as at 12 June 2020 the Company's cash position was £1.8m.”


 EQTEC – “Actions announced on 23 March 2020: • employees successfully transitioned to working from home, with little disruption and minor loss of efficiency;

• experienced no reduction in Group's design and engineering capability, and the delivery of these services to any of our projects; and

• video conferencing mitigating loss of physical presence with existing and potential new clients.

Manageable loss of efficiency and levels of disruption expected to continue, as project management controls and internal management systems are re-calibrated.

No delay in milestone payments and whilst some exposure exists on the supply side with some potential delays at project construction level, all possible steps being taken to mitigate and limit any risk.

Outlook – High degree of earnings visibility for FY20 on contracted or near contracted sales of technology with FY20 results expected to be significantly weighted to second half.

Global demand for Group's technology and services remains strong with the waste to energy market forecast to grow with early indications showing demand increasing as more countries and companies seek sustainable Green solutions to waste elimination and energy issues.

EQTEC is a strong and resilient business, with a proven technology and relatively low-risk business model, providing a good foundation to withstand the challenges of the Covid-19 pandemic and to realise future opportunities as countries seek to implement strategies to meet climate change targets whilst focusing on replacing and building new distributed energy infrastructure for localised resiliency.

Whilst the impact of Covid-19 for the global economy remains to be quantified, we believe the coronavirus pandemic may influence the pace and nature of climate action positively. Climate action could accelerate the recovery by creating jobs, driving capital formation, and increasing economic resiliency.”

Oil & Gas

 BP – “As part of its strategy development, bp has been reviewing its portfolio and its capital development plans. This work is informed by bp's views of the long-term price environment and its balanced investment criteria. Together these create a framework that seeks to ensure investments align with its strategy and add shareholder value.

In addition, with the Covid-19 pandemic having continued during the second quarter of 2020, bp now sees the prospect of the pandemic having an enduring impact on the global economy, with the potential for weaker demand for energy for a sustained period.

bp's management also has a growing expectation that the aftermath of the pandemic will accelerate the pace of transition to a lower carbon economy and energy system, as countries seek to 'build back better' so that their economies will be more resilient in the future. As a result of all the above, bp has revised its long-term price assumptions, lowering them and extending the period covered to 2050 so that it is now consistent with its ambition horizon. As part of its long-term strategic planning, and in the context of its continuing focus on capital discipline, bp is also reviewing its intent to develop some of its exploration intangible assets.

These actions will lead to non-cash impairment charges and write-offs in the second quarter, estimated to be in an aggregate range of $13 billion to $17.5 billion post-tax.”

Real Estate

 Real Estate Investors – “Our diverse and stable property portfolio has performed well, despite the extremely challenging market conditions and unhelpful government restrictions placed on commercial landlords. Rent collection for the March quarter so far is 81% and we remain in a dialogue with occupiers whose payments remain overdue many of whom are waiting for their businesses to re-open or are taking advantage of the 90-day government payment rule. However, we anticipate that we will agree the repayment of any outstanding arrears alongside their ongoing rental payments.

The last three months have been an active period with Covid-19 related negotiations on rent being agreed alongside lease extensions, which has resulted in 18 new lease events, leading to an improvement in our WAULT (Weighted Average Unexpired Lease Term) to 4.96 years to break and 6.63 years to expiry (31 December 2019: 3.82 years to break and 5.79 years to expiry). These agreements should act as a catalyst for some valuation gain or at least assist in combatting downward valuations.

As at the date of this announcement, our portfolio consists of 58 assets and 277 occupiers, with £17.3 million contracted rental income and occupancy at 95.14% (31 December 2019: occupancy 96.3%). Our diversified portfolio ensures that we have no material reliance on any single sector, asset or tenant, with our largest sector (by rental income) being offices at 38.12% and our largest occupier being the government at 7.98%.”


 Cake Box Holding – “The Group delivered another strong performance over the year, with revenues rising by 11% to £18.7 million. This was achieved despite a disruption in sales across our franchise stores as the Covid-19 pandemic started to impact trading during the final month of our financial calendar year in March 2020.

Notwithstanding the challenges presented by Covid-19 towards the end of the year, we have over the last few months of lockdown continued to plan how we can continue to grow the business in line with our plans, ensuring we deliver the Cake Box offering to the whole of the UK over time. During the year, we opened 20 new franchise stores, expanding our regional footprint in new locations including Harlow, Portsmouth and Cardiff, our first store in Wales. We were pleased with the number of franchise stores opened during the year given the disruption to our opening plans at the end of the year due to Covid-19. New openings like these continued to deliver good returns for our franchisees and customer satisfaction remains at high levels as well as increase our geographical reach to more customers.

Covid-19 – The Covid-19 pandemic has been unprecedented in scale and impact, and we have taken swift and decisive action to protect our customers, colleagues, franchisees, and the communities in which we operate, by implementing the necessary steps to safeguard our business through the crisis, in line with UK Government guidelines.

Whilst we remain in an uncertain and difficult situation for the country, Cake Box's values have ensured that we do things in the right way. I am very grateful and proud of the efforts of all our staff in Enfield and franchisees across our store estate, who have been supporting the effort in their local communities by sending thousands of our cakes to front line workers, especially the NHS.

There remains much uncertainty about the virus and how long it will continue to impact our business, our customers, and the wider public and economy, but I am confident that we have the financial and operational resilience to withstand the various challenges, emerge from the crisis and return to serving our loyal customer base whilst continuing to pursue our growth plans.

People – Guided by our founder-led management team, a core part of our strength lies in the entrepreneurial example they set for our growing network of franchisees, many of whom are running their own businesses for the first time. Some have expanded their business to encompass multiple shops and all are working hard to serve customers in their local communities.

On behalf of the Board and shareholders, I would like to place on record my sincere thanks to all our customers, staff and franchises for their incredible enthusiasm and dedication that has made Cake Box the success it is today, but especially over the last few uncertain and difficult months. I know they will help us to get Cake Box back to growth, reaching many more customers across the UK.

Dividend – Despite the strength of our balance sheet, as previously announced the Board concluded that it was not appropriate to recommend a final dividend for FY20 with the Group's full year results. Given the support the UK Government has given to the Group during the crisis, the Board decided it would have been inappropriate to utilise cash resources for anything other than protecting the financial strength and resilience of the business.

Looking ahead – While mindful of the challenges brought about by Covid-19, we will remain focused on continuing to deliver our growth plans over the long-term, whilst adapting to the near-term issues. Our capital light business model and strong balance sheet means we are well placed to weather any ongoing disruption to normal trading conditions.

It is difficult to look too far ahead in the current circumstances, but we remain confident that the strategy that has brought us success so far will help us to do so again and I am confident that the team will adapt to the new and emerging challenges.”

Support Services

 Bunzl – “The Group's resilient business model is expected to deliver a strong performance in the half year against the background of challenging trading conditions due to the Covid-19 pandemic. Revenue is expected to increase by approximately 6% at both actual and constant exchange rates. After adjusting for the impact of the number of trading days in the period relative to the prior year, at constant exchange rates revenue is expected to rise by approximately 5% as a result of an increase in underlying revenue of approximately 2% and an increase of approximately 3% as a result of recent acquisitions. Due to a change in mix of products sold during the period, including a higher

proportion of imported own brand products, overall operating margin is expected to be modestly higher than the comparable period last year.

The trading performance is expected to benefit significantly from the breadth of the customer sectors and geographies the Group operates in and the wide range of products supplied. The recent substantial declines in profitability in the lower margin foodservice and retail sectors are expected to be more than offset by strong performances in the grocery and generally higher margin safety, cleaning & hygiene and healthcare sectors, primarily driven by significant sales volumes of Covid-19 related products. The Group, aided by the extensive knowledge and experience of Bunzl's reliable, added-value sourcing operation in Shanghai, has helped healthcare providers and other customers to build their stock levels of key and essential products needed to support their response to the pandemic.

At constant exchange rates revenue growth is expected to be particularly strong in both Continental Europe and Rest of the World driven by demand for Covid-19 related products while North America and UK & Ireland are expected to see slight increases in revenue.

As a result of the better than expected trading performance, the Company intends to repay employee-related government support packages and bring forward the settlement of tax deferrals where possible to do so.

As highlighted in the first quarter trading statement in April, it is not possible to assess with any certainty the impact that the Covid-19 crisis will have on the Group's performance for the year due to the lack of visibility of how the virus might affect trading conditions during the second half of the year. The Company remains cautious about the outlook given the risks and uncertainties associated with the emergence of global economies from lockdown and the timing of recovery of the Group's markets in the second half, particularly as the volume of orders for Covid-related products seen during the first half is not expected to be repeated with many customers having already built significant stocks of products for the remainder of the year. Specifically, while sectors such as retail and foodservice are expected to continue to be affected by reduced, albeit improving, demand, those parts of Bunzl supplying the grocery, cleaning & hygiene and healthcare sectors are expected to deliver a resilient performance, with a potentially mixed trading performance from the safety sector.

There has been no significant change in Bunzl's financial position during the first half and the Company continues to have substantial funding headroom available with strong cash flows and a robust balance sheet.”

 SThree – “The Group's robust performance in Q1 was outweighed by the impact of the Covid-19 pandemic in Q2 across all of our territories and sectors. As communicated in our announcement of 20 May 2020, aggregate demand for staffing in the period has been significantly less than what would normally be expected, with notable spikes and troughs across different markets and industries in the short term. As such, following a flat Q1, Group net fees in Q2 declined 12%, with Contract, which accounts for 76% of Group net fees, delivering a more resilient performance across both quarters as would be expected given the nature of the model.

DACH delivered a solid performance, grounded by significant growth in Q1, followed by a decline in Q2 due to Covid-19 impact and against a particularly strong comparator in the prior year. Technology in H1 was up 1% with a strong Q1 and Q2 slightly down (6%), with strong performance in Infrastructure and Software Development. Life Sciences, after an exceptionally strong Q1, saw Q2 decline 6% as the pandemic affected some clients' ability to run clinical trials and manufacture drugs.

The results for EMEA excluding DACH largely reflected the UK's challenging performance. The Netherlands, our largest country in the region, delivered a resilient performance in H1 with net fees declining 5%, albeit with a 12% decline in Q2. Notable performances were delivered in Life Sciences, up 10% (Q2 flat) driven by increased placements across Quality Assurance and Medical Devices, and across Engineering, with our particular focus on Manufacturing, High Tech and Chemicals.

Our US business showed its resilience across both quarters, with strong growth across Life Sciences up 13% (Q2 up 11%) and Technology up 4% (Q2 up 5%). The USA is a good example of the importance of investing in the right vertical niches and understanding customer needs. Thanks to a keen focus on this strategy the region benefitted from increased activity in Quality Assurance, as more new drugs were manufactured, and seen good growth in tech skills that support digital transformation such as Mobile Applications and Software Development, in line with the changing customer needs. As a key area of focus for the Group we have continued to invest in the region and are aligning our resources with the best long-term opportunities.

APAC net fees declined in the half year as the region was impacted by both the Australian wildfires and the earlier impact of Covid-19. Japan was down 24% (Q2 down 36%) in the first half with our largest sector, Technology, down 4% (Q2 down 35%) due to this business being focused on Permanent and a decline in demand for skills in Advertising & Digital media, Tech consulting & implementation and Enterprise Technology.

Group average headcount was up 2% YoY, reflecting a 5% increase in Q1 in line with our growth strategy, followed by a decline in Q2 in response to the crisis. There were also marked differences by region in line with our previously stated strategy to focus on specific niches within sectors and markets where we can gain valuable market share and cement our position. This was reflected in YoY period end headcount up 3% in the US, up 1% in DACH, down 13% in EMEA excluding DACH and down 19% in APAC. Group headcount was down 5% sequentially Q2 vs Q1.

Balancing the current economic headwinds with the acceleration of the long-term secular trends of STEM and flexible working, we are implementing programmes to rightsize our cost base, whilst continuing to make targeted investments and bolstering the strength of our core platform. The combination of these factors with the impact of the pandemic will result in a short-term decrease in our operating leverage, with a resulting impact on our profitability compared to the same period last year.

Liquidity – SThree remains in a strong financial position, with net cash at 31 May 2020 of £31m (31 May 2019: Net debt £8m). The Group has a £50m revolving credit facility ("RCF") with HSBC and Citibank, which is committed to 2023. The Group is also eligible to funding under the Bank of England's Covid Corporate Financing Facility ("CCFF") of £50m.

As at 31 May 2020 the Group has total accessible liquidity of £136m. This is made up of £31m net cash, a £50m revolving credit facility ("RCF"), which has now been fully drawn down, a £5m overdraft and £50m from the CCFF (both not yet drawn down). In addition, SThree has a £20m accordion facility as well as a substantial working capital position reflecting net cash due to SThree for placements already undertaken.

During Q2 we took strong action to mitigate the potential impact of the crisis on our ability to collect amounts due from our clients by reallocating headcount to the Glasgow collections team and enhancing our credit risk processes and systems in an agile fashion. The result was an in quarter reduction in our Days Sales Outstanding to 42 days (Q1: 45 days).”


 IDOX# – “The assessments performed and disclosed in our FY2019 reporting in early April remain valid and the current year financial performance is expected to be in line with existing expectations. Cash collection during the pandemic has exceeded our expectations, and operationally the Group continues to win new work and deliver services largely as anticipated. We have seen a greater slow-down in new EIM business than anticipated due to the recent pressures in the oil and gas sector. However, the benefit of its high levels of existing recurring revenue means it is not reliant on winning new work in this area. All other parts of the Group remain robust as expected despite the impact of the Covid-19 pandemic on the global economy. Net debt at 31 May 2020 was £14.0m, including £32.2m of available cash following the full draw-down of banking facilities.

Our staff continue to work from home effectively, which we anticipate will continue in the short to medium-term whilst we continue planning for a phased return to our offices. Idox has benefitted from the fact that its business model has, for a number of years, included a large number of employees operating remotely. Therefore, the move to home working across the Group was seamless and readily adopted and has ensured we have had suitable structures in place to monitor employee health and wellbeing.”

Lifting restrictions

• France is set to re-open its borders to some travellers as it begins to relax its lockdown measures. The country will allow travellers from almost all European Union countries to enter from today. Visitors from other continents will be allowed to enter from 1 July. However, travellers from Spain, along with those from the UK, will have to quarantine because of their own restrictions on French arrivals.

• Spain has brought forward the re-opening of its borders by ten days, allowing most Europeans to travel in from 21 June.


• Italian consumer prices for May contracted -0.2%, both on a mom and annual basis. That is worse than the previous readings of -0.1%.

• EasyJet planes will be taking to the skies again after weeks of being grounded, as the British carrier resumes a small number of mostly domestic flights today. It will largely be flying mostly routes within Britain to cities like Edinburgh and Belfast, and to European cities in France, Switzerland, Italy and Portugal.

• The Disneyland theme park in Hong Kong is set to re-open this Thursday, but with a reduced number of visitors. Visitors will also be required to wear facemasks.

• Australian Prime Minister Scott Morrison said it would still take two years for the economy to return to where it was pre-pandemic and today outlined a series of building and infrastructure projects to get the economy going again.

• Ghana is making wearing facemasks compulsory.

• Beijing recorded 36 new locally transmitted cases on Sunday – on Saturday it also reported 36 cases – all of which have been linked to the city's largest wholesale market. A number of districts in the city have now closed schools, introduced security checkpoints, and ordered people to be tested for the virus as the city attempts to curb its spread. Sports and entertainment venues have been closed and temperature checks have been re-introduced in supermarkets and offices.

• From today anyone travelling on public transport in England must wear a face covering. Passengers without a covering will be asked to wear one, or will face being refused getting onboard or fined £100.

• According to the Office for National Statistics, sales in the UK declined by 18.1% during April.

• Denmark has announced a raft of new economic stimulus measures. About £7.2bn will be paid out from a frozen holiday allowance fund. Citizens on public health benefits will separately get a £120 stipend, and £1.2bn has been set aside for struggling companies.

• A study by Visa found that nearly three quarters (73%) of Brits have concerns about small businesses re-opening as lockdown measures ease, and three in five (61%) feel less comfortable shopping in store than before the pandemic. It adds that only 54% of Brits will only return to physical stores if strict social distancing is in place, while one in five (18%) will not return until a vaccine is developed.

• Authorities in the southern Indian city of Chennai are to reimpose a lockdown on Friday after a surge in new coronavirus cases.

#corporate client of Peel Hunt