Coronavirus - If not them, who?

Donald Trump has withdrawn funding from the WHO in a spat over who is to blame for the outbreak.

While his motivation is likely to be political rather than financial, he will not be the last to direct the blame. As the economic cost of the virus begins to rise, more fingers will be pointed. Today, the FCA ordered insurers to pay-out on claims (where there is a ‘clear obligation to pay specifically included’ in a policy), or explain why. Insurers worried about their own existence are reluctant to pay-out on the flood of claims. As the days go by and the bills keep mounting, picking-up the tab will become more and more unpalatable.

Cases – 73,969 Deaths – 6,983
Cases – 1,996,690 Deaths – 126,649


  • US withdraws funding from the WHO.
  • Denmark is to let young children return to school.
  • The FCA has ordered insurance companies to pay-out claims.

The FCA backs insurers regarding business interruption claims.

  • In a letter to the insurance industry, the FCA has recognised that most property policies in the UK have only basic cover for business interruption claims and, as such, do not cover pandemics.
  • Hence, there would be no obligation for the insurance industry to pay claims where pandemic cover is not included and the FCA sees no reason to intervene.
  • However, in the case where there is a clear obligation to pay included specifically in the wording, the insurance industry is expected to settle claims quickly, even if this would mean providing only an interim payment to policyholders until the claim is fully settled.
  • In the case of disputes (we believe there are likely be many), the FCA is referring small business (less than 50 employees) to the Financial Ombudsman, which can offer faster decisions than a court process for claims up to £355k.
  • The FCA is hereby providing backing to small business insurers, such as the Lloyd’s companies, that have been under pressure to pay out business interruption claims on policies that were not intended to cover a wide pandemic.
  • There will be a grey area of dispute. However, the FCA is clearly focusing on the issue of making sure that business interruption claims do not threaten the viability of the insurance industry in the UK and that a principles-based wording of UK insurance contract law is adhered to.

Company news
Buildings & Construction

  • Ferguson– “Group trading to 31 March 2020 was not materially impacted by Covid-19, though revenue growth weakened towards the end of the period.

In the US since the half year, revenue growth accelerated in the two month period to 31 March and was broadly based across the regions and major business units with the order book at record levels. Within the last ten days the impact of Covid-19 has significantly increased mainly as a result of government actions and societal reactions as individual cities and states in the US have been increasingly impacted by the virus.
As a result the overall trading situation on the ground is therefore mixed across the US. For example, in recent weeks revenue has deteriorated in New York, which has experienced severe outbreaks of the virus and have implemented widespread lockdowns. In contrast, revenue trends have continued to hold up well in many other regions and cities which are currently less affected by the virus.
To date, the majority of our US branch network has remained open. However, we are preparing carefully for lower activity levels given the likelihood of further regions experiencing disruption due to the spread of the virus. In light of recent CISA guidelines we have been working with the relevant authorities across each state and local jurisdiction to ensure we can continue to support our customers.
In Canada most of the markets are in lockdown and the current situation in the UK is extremely challenging with a widespread lockdown currently in place. In both regions our branch networks remain open where essential services are being provided.
As indicated at the time of the half year results given the unprecedented uncertainty around the impact of Covid-19 it is not possible to assess with certainty the impact it will have on the group's financial performance for the year. The Company is therefore not providing guidance for the year to 31 July 2020.
Cost reduction actions – In light of the evolving Covid-19 situation, the Company has moved quickly to protect liquidity and cash flow while ensuring it is well positioned to benefit when the recovery takes place. Ferguson benefits from an agile business model and, as we prepare for short-term revenue pressure our approach has been to protect our skilled workforce which is critical to the long-term success of our business. We have already taken a number of prudent cost saving measures to protect short-term profitability and cash generation of the business. This has included a hiring freeze, a reduction in associate hours, overtime and the use of temporary staff, and temporary lay-offs being implemented in the worst hit regions. We have taken decisive action in the worst hit regions whilst ensuring the business is appropriately sized for the post Covid-19 operating environment.
UK demerger – The Board's strategic intent to demerge the UK business is unchanged. The demerger of Wolseley UK remains on track to be completed this calendar year as previously announced. This will of course require market conditions to normalize by the latter part of the year.
Robust financial position – Ferguson has a proven cash generative business model and enters the current period with a strong balance sheet and significant liquidity headroom. The Company's net debt excluding leases at 31 March 2020 was $1,929 million and the ratio of net debt to the last 12 months adjusted EBITDA was approximately 1.0 times. As at 31 March 2020 the Group had c.$2.5 billion of available liquidity comprising readily available cash of approximately $0.7 billion and $1.8 billion of undrawn facilities. Since 31 March the Company has been approved and has issued commercial paper under the Bank of England's Covid Corporate Financing Facility (CCFF).
The Company has also introduced the following measures to protect its cash position:

  • We have suspended the $500 million share buy back announced on 4 February 2020. At 31 March 2020 the Group had completed about $100 million of the program.
  • The Company has paused current M&A activity due to current market uncertainty. In the current financial year to date we have invested c$340 million in 6 businesses which are in the process of being rapidly integrated. Selective bolt-on and capability M&A remains an important part of the Company's strategy.
  • After careful consideration the Board has decided to withdraw the interim dividend due for payment on 30 April 2020. While the balance sheet remains strong, the Board believes this is currently in the Company`s immediate best interests, balancing all our stakeholders' interests against a background of significant uncertainty as to the impact and duration of the current Covd-19 disruption. We recognize the importance of the dividend

to our shareholders and the Board will review this decision later in the financial year as trading conditions become clearer.

  • Following a careful review of existing capital expenditure plans we now expect it to be in the region of $280-300 million for 2019/20. Given our strong liquidity position the Board's intention remains to scale future capital investment to ensure we continue to invest in and develop the business and execute our strategy for the long-term.”


  • Chesnara – “The Company's focus has been, and remains, on ensuring that it continues to support its customers and colleagues whilst maintaining its financial and operational resilience.

Financial update – Chesnara remains well capitalised. Based on the closing market position on 31 March 2020, our solvency cover ratio is estimated (Note 4) at approximately 163% (31 December 2019: 155%), after allowing for the payment of a proposed dividend of £20.8m (13.87 pence per share) which represents a 3% uplift on the 2018 final dividend. Subject to approval at the AGM, this dividend will be paid on 2 June 2020 to shareholders on the register on 24 April 2020.
This preliminary announcement shows that we are foreseeing dividend income from our divisions during 2020 of £50.1m. Based on divisional solvency and liquidity estimates as at 31 March 2020 this amount is still expected to be paid during the second quarter, although we will await the results from our full quarter one valuation prior to making the payments. There is a degree of risk that following the deferral period and on reassessment a proportion of the total expected divisional dividends is not paid. Even assuming a realistic worst-case outcome regarding divisional dividends Chesnara retains a healthy post dividend cash balance.
As expected, and in line with our reported sensitivities, market movements up to 31 March 2020 have had an adverse impact on our Economic Value. We estimate the impact of market movements to that date to be a reduction of approximately £90m from the 31 December 2019 position of £670m.
Operational update – Despite the challenging circumstances our operations at both Head Office and our divisions continue to function effectively. Our business continuity plans have been implemented and continue to be adapted as the Covid-19 situation evolves, with new working arrangements in place and with the vast majority of our colleagues and outsource partners now working from home. Our risk management and control framework continues to be effective.
New business activity in the Netherlands and Sweden for Q1 has seen some small impact from the current environment. The impact is expected to be greater in the rest of the year, with a corresponding reduction consequently in the capital required to support new business.”

  • Jupiter Fund Management – “So far this year, in common with the asset management industry as a whole, Jupiter has faced challenging market conditions, largely brought about by the global coronavirus (Covid-19) pandemic, which has had a significant adverse impact on the economy, global financial markets including asset values and, consequently, on our AUM. During this volatile period, which has seen most asset classes experience significant falls in value, Jupiter's relative investment performance has strengthened, with 80% of AUM above median over three years, 75% in the

top quartile. This level of performance on behalf of our clients is testimony to the expertise of our investment teams and reaffirms our belief that active management delivers long term returns to clients and supports our commitment to high-conviction active management.
The health and wellbeing of our employees and their families is of the utmost importance to Jupiter. Since early March we have adopted remote working arrangements for all employees. From a business and operational perspective, these have been implemented without any material disruption to our business or our ability to deliver for clients. We continue to monitor closely all developments relating to the coronavirus outbreak and its impact on working patterns, employees and key service providers, with the principal aim of ensuring the welfare of our employees and on the continuity of our business and maintenance of high standards of service for our clients.
In this uncertain environment, the Group's commitment to maintaining an appropriate cost base remains as important as ever, and we continue to review and challenge costs within the business, making reductions to costs where we are able to without affecting our ability to deliver the investment returns and high standards of service our clients expect from us. The Group notes the swift and decisive measures taken by the UK government to support businesses during this difficult time but confirms that it has no current intention to furlough any staff or to take advantage of any such government scheme during this period. As announced in our year end results, the Group made its scheduled ordinary dividend payment to shareholders on 9 April 2020.”

Food, Drinks & Household

  • Carr’s Group – “The impact of the Covid-19 pandemic on the Group remains under close and constant review by the Board. To date, we have not seen any material adverse direct impact, but there remains significant global uncertainty. The Group has implemented a range of measures and planned contingencies across both divisions which are designed to minimise the impact of the pandemic.

The health, safety and well-being of our employees and customers is of paramount importance. We are following government guidelines and have implemented rigorous social distancing controls, hygiene measures and shift-working practices across all locations, and our people are working effectively from home where possible.
In Agriculture, measures have been taken to ensure that all of our UK and overseas manufacturing facilities can remain operational, and that our network of UK retail outlets can be used to supply our core ranges of feeds, supplements, animal health products, fuels, machinery, retail products and services to our farming customers, who are critical to the UK's food supply chain. We are carefully monitoring our stock levels, together with our supply and distribution channels, to ensure that we remain operational.
In Engineering, the majority of our facilities remain operational as we continue to supply products and services in connection with projects of national importance, particularly across the nuclear decommissioning and nuclear defence sectors. Our range of current and future contracts across the division is being closely monitored and we continue to communicate openly with our supply chain partners in order to minimise any potential negative impact.
The Group remains in a strong financial position. Net debt, excluding leases, was £25.4m at the period end (excluding finance leases, H1 2019: £20.5m; FY2019: £20.9m), representing 1.2 times adjusted EBITDA. We also had undrawn facilities at the period end of £22.4m, with our main banking facilities maturing between 2021 and 2023.
As part of its response to the Covid-19 crisis, the Group has ensured it has a rigorous short term weekly and longer-term monthly cash forecasting process in place. These have been stress tested on a number of different, but realistic, scenarios including the temporary closure of several businesses and, predominantly in Agriculture, modelling the impact of delays in debt collections. In each of these scenarios, the Group has sufficient funding in place within its current facilities. Measures have also been taken to restrict capital expenditure, including the deferral of all non-time critical expenditures to the next financial year, and the Board has taken the decision to defer the payment of an interim dividend until the full effects of the pandemic have become clearer. The Group is keeping under review the opportunity to appropriately utilise government assistance schemes where these provide additional flexibility.
We are moving decisively on all fronts to address the challenges presented by Covid-19 and consider the Group to be well placed to endure this period of material uncertainty.”


  • UDG Healthcare– “Within Ashfield, as a dynamic and technology-enabled business, we continue to serve our clients remotely where possible, although we have seen some project deferrals and cancellations. In field-based activities in Ashfield (particularly in our Meetings and Events business, field-based representatives, clinical educator business and audit services in STEM) are experiencing more significant disruption and reduced activity.

In Sharp, where we package critical and in some cases life-saving medicines for patients, the business has been categorised as essential and therefore continues to operate. While demand within Sharp remains very robust, temporary disruption to production schedules and capacity resulting from the additional health and safety measures, along with workforce availability, is expected to reduce our efficiency and revenue.
Cost control measures implemented – The Group is actively adopting cost control measures to mitigate the potential negative impacts from Covid-19. These measures have included: the reduction of appropriate variable costs; tight control of discretionary expenditure; a recruitment freeze; reducing freelancer expenditure; and a temporary reduction in labour including reduced working hours and furloughing of employees.
The Board and Senior Executive Team have voluntarily agreed to take a 20% reduction in their respective fees and base salary for at least the next three months.
Balance sheet, liquidity and dividend – The Group has a robust financial position with a strong balance sheet and liquidity profile, with a net debt to EBITDA ratio of approximately 0.3x at 31 March 2020 (as defined by our debt agreements).
Having regard for all stakeholders' interests and the wider societal challenges, the Board has taken the decision to suspend an interim dividend for H1 FY20. The Board will keep this decision under review in the financial year as the effects of the Covid-19 outbreak become clearer.”


  • Kromek Group – “Announce that it intends to commence the manufacture and sale of medical ventilators in the UK and globally under license from Metran Co., Ltd (‘Metran’), a Japan-based leading developer of medical ventilator products and technology, to support the Covid-19 response.

Kromek expects to commence production of ventilators before the end of April 2020 and to produce up to 2,000 units within twelve weeks, with 1,000 units available within eight weeks. Following the signing of a license agreement, which is expected shortly, Kromek intends to sell the ventilators in the UK and globally.”

  • Smurfit Kappa – “All our facilities continue to operate, giving our customers continued security of supply of our innovative, sustainable packaging solutions. SKG has been deemed an ‘Essential Business’ in generally all of the countries in which we operate and we are uniquely positioned to continue to service our customers’ needs given our unrivalled operational footprint and broader market-offering. SKG has a critical role in the fight against Covid-19, as without our packaging many vital supply chains including medical equipment, pharmaceutical, food and sanitation products would not be delivered.

Our Financial Position– At the end of the first quarter of 2020, the Group had liquidity of over €1.5 billion, average debt maturities of over 5 years, no bond maturity until 2024, all of which is supported by the Group’s strong operational free-cash-flow.
Our Balance Sheet remains strong with leverage of 2.2x at the end of the quarter. We are rigorously managing our working capital and we currently estimate that capital expenditure for 2020 will reduce from previous guidance of €615 million, to be in the range of €500-550 million (€730 million in 2019).”


  • Hastings Group – “Motor insurance accident frequencies reduced during March, with this trend expected to continue for the duration of Covid-19 restrictions.

Accident severities continue to increase and the Group is monitoring further inflationary risks, which are likely to continue throughout 2020 following the easing of Covid-19 restrictions, particularly caused by disruption to repair networks and supply of parts.
Trading trends in light of Covid-19 continue to be monitored closely, including any impact in trading income due, in particular, to reduced mid-term policy adjustment income and the impact of the actions the Group has taken, and may continue to take, to support policyholders.
Capital position, cash generation and liquidity remains strong. The Group has no business lines with direct claims cost exposure resulting from Covid-19, for example travel or business interruption insurance. The Board continues to monitor market developments, financial implications, and related stress scenarios, and remains confident of the Group's robust capital position, current outlook and ongoing ability to support policyholders and continue to invest in the wider economy. Taking into account all factors, the Board still intends, at this stage, to seek shareholder approval of the final dividend of 5.5p at the AGM on 21 May 2020; this represents a reduction of 39% on the 2018 final dividend.”


  • 888 Holdings – “888 is monitoring closely the spread of Covid-19 and following all government and local health organisation guidelines in order to keep its global teams safe and healthy. We have implemented our business continuity plan, including improvements to our technological infrastructure, priming of operational teams for emergency support, implementing work-from-home processes, and communicating clearly and constantly with personnel. The majority of our staff currently work from home across our locations.

While it is unclear how this fast-moving situation will evolve over the coming months, the postponement and cancellation of sporting events will impact 888's Sport vertical, which accounted for 16% of revenue in 2019. There is currently evidence of increased customer activity in the Group's Casino and Poker products that might, in part, compensate for the sports betting disruption for a period of time. However, in the event of a prolonged period of global macro-economic uncertainty, it is possible that consumer spending across the Group's online gaming product verticals may also become impacted.
888 recognises that, with people spending more time at home and with potentially increased stress from economic uncertainty, 888's vigilance on safe gambling and preventing gambling-related harm is even more important than ever. The Group continues to offer its customers support and is proactively communicating with its customers to make them aware of safe gambling tools to limit and control their play. In addition, 888 continues to leverage its unique Observer software to scan player data and identify potential areas of concern in order to prevent gambling harm.
As a purely online operator with diversified brands across product verticals and geographies, a strong balance sheet with $99.5m of cash and cash equivalents at the 2019-year end, and a proven track record of delivering operational efficiencies, 888 is confident in its ability to manage these challenges. Underpinned by the strength of 888's technology, its growing customer base and its talented and committed teams, 888 continues to see a number of significant growth opportunities for the Group which it is confident of progressing during 2020 and beyond.”

#corporate client of Peel Hunt

To read the full research note, please click here