Coronavirus Outbreak - Italy

Italy – coronavirus impact
The rapid spread in Northern Italy brings the risk of a material outbreak in Europe materially closer. Italy has reported 152 cases and 4 deaths, which compares with only 17 on Friday. The government has responded by locking down 10 towns with 50,000 people. If this is the extent, then the economic impact will be fairly limited; however, there is clearly a risk of a broader and extended lockdown. This note looks at the companies under our coverage with exposure to Northern Italy.

Events cancelled
A series of events were cancelled over the weekend, including the Venice carnival, the Mido eyewear show in Milan, four Serie A games (in Turin, Milan, Bergamo and Verona) and Armani held an empty show in Milan.

Ten towns have been put into lockdown, with no-one allowed to leave and people told to remain in their homes. These are all in the Lombardy region in Northern Italy. The quarantine will potentially be in place for several weeks. The overall region of Lombardy and Veneto contributes around a third of the Italian economy.

In the financials sector, although there is limited exposure, Arrow Global has a number of operations in Italy. The country accounts for c13% (as at December 2018) of the group’s Estimated Remaining Collections, after a number of acquisitions in recent years. Arrow’s exposure is likely to be fairly widespread across Italy, therefore the actions to try to contain the virus could have an impact on collections performance.

Food & Household Goods
McBride has operations in Bergamo, north-east of Milan. The business predominantly supplies the Italian market and so is likely to see a reduction in business in the short term. Italy is c5% of sales.
Victoria’soperations are in Sassuolo, which is c100km from the outbreak. The business’s tiles are mainly for export.
Bodycote – 3 sites out of 180 in Italy. All are in the north and contribute 1-1.5% of sales.
Coatshas zip operations in Codroipo (NE Italy). The production facility is far enough away from the affected region to see no impact at this stage. However, some customers’ facilities may be affected. Zips are c5% of sales.
DS Smith – 11% of sales are in Italy, which makes it the most exposed in the sector. Almost all of the sales are manufactured locally and c70% of sales are FMCG.
IMI – owns two Italian businesses in Critical Engineering that sell large valves in the global petrochem sector, so would be almost entirely export.
Melrose has two driveline plants in Italy out of 54. In Powder Met, it is again 2 plants out of c20. FCA on a global basis is 7-8% of Driveline sales and c4% of Powder Met.
Morgan Crucible has two manufacturing sites (seals & bearings, thermal) and one sales office. Morgan Crucible has c80 sites.
RHI Magnesitahas a sales office in Brescia.
Rotork has a factory in Lucca, c120km south of the affected area.
Spectris has one plant (sales content is less than 3%).
Synthomer has a production facility at Filago in Lombardy. The site is c30km north-east of Milan and about 60km north of Codogno. The business makes a range of products at this site, including SBR & NBR chemistries. It’s one of 14 sites across Europe (excluding OMNOVA). Management is assessing the situation.
TI Fluids has 4 plants in Italy out of 111 – Brindisi, Busalla, Cisliano and Melfi. On a global basis, FCA is 9% of sales.
Tyman – owns a business called Giesse, which is headquartered in Bologna and has an additional site north of Milan. Sales are €80m and we assume half are manufactured locally. Nearly all go as exports.
Vesuvius has three sites in Italy. A Foseco sales office in Vermezzo, a Vesuvius sales and service office in Genova and a Vesuvius manufacturing plant in Sidermes.
Vitec has a manufacturing site in Feltre in Northern Italy, where it manufactures its Manfrotto tripods – around 80% of its photographic supports are made there, so a shutdown would undoubtedly affect the group’s supply chain.
Trifasthas a low-cost manufacturing site in central Italy, north-east of Rome, serving the domestic appliances market primarily (20% of sales), but given its model of self-manufacture alongside distribution it will likely be able find alternative sources where necessary.
Milkrite-interpuls, Avon Rubber’sdairy business, has its European base in Albinea just south-east of Parma, where it manufactures 25% of the group’s dairy products. These are mostly the larger capital equipment pieces, and around 90% of what is made there is exported. We would estimate that it should be able to absorb a short shutdown period, but clearly a longer period of inactivity would affect the wider dairy business for Avon.

Support Services
Overall the support services sector is largely UK-focused, with little direct exposure to Italy and the Lombardy and Veneto regions. There is some limited exposure in business services.
Rentokil has some exposure to Italy, with branches in the two affected regions. Southern Europe, which also includes Spain, Portugal and Greece, accounts for 5% of group revenue (c£34m).
Babcock Aviation’s Italian Emergency Medical Services, Search and Rescue and Firefighting operations are headquartered in Lombardy. Europe accounts for c13% of Babcock’s group revenue and includes aerial emergency services aviation in Iberia and Scandinavia as well as Italy, and Defence in France. Neither the building & infrastructure nor rental services sectors have exposure to Italy.

What happens if there is a big outbreak in UK/Europe?
Delivery – If the virus does become a global pandemic, delivery platforms will start to benefit materially. In our coverage, JustEat-Takeaway (much of Europe) and Ocado will be key short-term beneficiaries in a resulting behaviour change. Longer term, this might act as a catalyst to accelerate the penetration of delivery.
Travel –People will likely start to travel less and take to working from home. This will have a negative impact on technology companies that support transportation, and in our coverage, Trainline (Hold, TP 430p) will likely see volumes dip. However, on the upside, companies like Gamma Communications (Add, TP 1,420p), which is trying to make communication over long distances easier, may benefit if people stay at home or travel less.
Leisure – Just as seems to be the case in Asia, an outbreak here will be a net positive to video games companies, with more people turning to video games as an outlet during a pandemic. That said, with many of our video game names having studios in Europe, production of new games will become difficult. Unlike some other technology companies, the right control around IP means remote working is more difficult in this industry.

The spread of coronavirus to Italy is negative for the airline sector and Royal Mail. IATA estimated on 20 February that airlines will lose US$29.3bn of revenues, with airlines from Asia Pacific losing US$27.8bn and those in the rest of the world US$1.5bn. We expect the US$1.5bn to rise with the spread of the virus to Italy, with demand for travel from North America likely to soften, which would hit IAG in particular as it is heavily reliant of trans-Atlantic routes. The LCCs (Low Cost Carriers) expected to see demand increase in a heavily supply constrained market given the continuing absence of the 737 Max. However, Italy is one of the biggest markets for air travel in Europe, representing around 9% of EEA capacity and anything that weakens demand for travel to or from that market is likely to impact easyJetRyanair and Wizz Air.
Royal Mail’s parcel subsidiary GLS has a significant exposure to Italy, which is its second biggest market and could leave the stock vulnerable to a further decline given the imminent CWU ballot for industrial action which is due to take place between the 3 and 17 March.

Travel & Leisure
With the spread of the disease to another developed country the risk of a pandemic developing has increased, and with that investor fear of a pandemic. Evidence of the spread of the disease to Africa is the next likely material fear inflexion point because of the lack of resources to prevent rapid spread. In light of this, travel-related stocks are likely to be under further pressure. Carnival is already at a 52-week low and probably has the potential to go lower, Costa Cruises of Italy is its major European brand. IHG, contrary to our expectations, reassured the market with its recent prelims because of its low proportionate exposure to China and management’s description of the business as a global group of largely domestic hotel businesses. Despite this we believe there is further downside here.
Outside travel, GVC and Playtech operate the leading land-based betting businesses in Italy (Eurobet and Snai respectively at c9% and c 39% of FY20E EBITDA respectively), which would be affected if there were to be extensive cancellations of Italian football matches. As the locations at which bets are taken are quite small we do not expect fear of assembly and infection to impact business. More generally, UK-focused companies appear to be less at risk while the number of the cases remains low. However, if there is a more material outbreak in the UK we would expect leisure businesses which involve people meeting in large groups, particularly involving children, to be most affected; cinema would appear to be most at risk, local pubs less so.

As the risk of a coronavirus pandemic increases outside Asia, the insurance industry is bracing itself for the potential of significant exposures to claims across Liability, Business Interruption and Event cancellation (Contingency) classes. The recent cancellation of a number of events in Italy and Spain is the first sign that the impact of the coronavirus is being felt across the European economy. The Lloyd’s insurers write event cancellation from London and major insurers such as Beazley and Hiscox could potentially be exposed. However, the larger risk in our view is business interruption and liability claims.

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