Coronavirus - Outflanked

China’s swift and dramatic response in Hubei province seems to be paying dividends. However, new cases outside China overtook those from within for the first time today, and the war on COVID-19 now has a new front. Italy has responded with localised travel restrictions and South Korea plans “maximum” quarantine steps, although neither have responded with the same intensity as China, and Iran is refusing to impose any quarantine measures at all. Ministers said this is old fashioned and it does not believe in it. As the virus infects countries with differing beliefs, abilities and priorities the containment will not get easier.

Cases: 910
Deaths: 64

Cases: 81,078
Deaths: 2,761

Company news
• Adecco (recruitment) – “No material impact” from coronavirus at this stage, according to its CEO.

• Avingtrans (engineered components): “We believe that the coronavirus risk in China can be largely mitigated, although there may be some disruption in our supply chain. With our Chinese factories recently reopened after the extended New Year holiday, this could have some effect on the full year, but we believe that any impact will be contained and not material.”

• Berjaya Corporation (Malaysian conglomerate) says its hotel and resorts business is directly and adversely affected by the coronavirus outbreak and it expects the subsequent quarters to be challenging.

• Chevron has ordered employees at its Canary Wharf London office to work from home as the company awaits a coronavirus test for one of its workers.

• D&O Green Technologies (semi-conductor manufacturer) has said the coronavirus outbreak will affect near-term sales of the group, especially in China.

• Danone: “For 2020, new guidance of mid-single-digit recurring EPS growth, reflecting +2-4% like-for-like sales growth and recurring operating margin above 15%, as we accelerate investment and factoring in assessment to date of the impact of coronavirus outbreak.” This will reduce Q1 revenue by about €100m.

• Diageo: “Greater China: Bars and restaurants have largely been closed and there has been a substantial reduction in banqueting. As the majority of consumption is in the on-trade, we have seen significant disruption since the end of January, which we expect to last at least into March. Thereafter, we expect a gradual improvement, with consumption returning to normal levels towards the end of FY20. On-trade, in other impacted countries in Asia Pacific: The outbreak in several other Asian countries, especially South Korea, Japan and Thailand, has led to events being postponed, a reduction in conferences and banquets, and a drop in tourism, which have all impacted on-trade consumption. We expect gradual improvement throughout Q4 FY20. Travel Retail, mainly in the Asia Pacific region: The outbreak has caused a significant reduction in international passenger traffic, especially in Asia. Recovery of passenger traffic is assumed to be gradual, resulting in weaker performance for the remainder of FY20. On this basis, we estimate the negative impact in FY20 on the group's organic net sales and organic operating profit to be in a range of £225-325m and £140-200m, respectively, with the timing and pace of recovery determining the impact within these estimated ranges. The COVID-19 situation is dynamic and continues to evolve and these ranges exclude any impact of the COVID-19 situation on other markets beyond those mentioned above. We will continue to monitor the situation closely.”

• Hermes (high fashion brand) has reopened 7 out of its 11 closed stores, leaving 4 of its 43 stores on the mainland and areas like Hong Kong and Macau still closed due to the coronavirus outbreak.

• KLM (Dutch airline) is to make budget cuts; cutting back on hiring new staff and external consultants, delaying new IT projects and office refurbishment plans and reducing travel expenses significantly according to CFO Erik Swelheim. “The impact on KLM’s revenues will be very significant and will only partly be mitigated by lower costs and a lower fuel price,” Swelheim went on to say in a press conference.

• Porvair(specialist filters) – Chris Tyler Group Finance Director: “We are in the hands of the province as to when we reopen our Chinese factory [c40 miles from Wuhan]. The latest guidance is 11 March 11… a mix of business that goes through the plant, some manufactured and some imported from the US. The US import business is continuing. [Overall], we don’t see this as being a significant issue in group terms. I know a lot of companies are starting to talk about secondary effects in supply chains, etc. We have not seen anything significant as yet, but with the news coming out of Italy in the last few days and the potential spread into Europe, this could change.”

• Rio Tinto: “There could be an impact on all projects across the industry,” according to the CEO, with some Chinese suppliers already declaring force majeure.

• Royal Caribbean has cancelled 30 sailings in South East Asia and modified some itineraries due to the outbreak.

• Sabre (travel technology) – The virus is expected to reduce adjusted earnings by 14c a share to 23c on US$100-150m lower revenue. Sabre expects adjusted EBITDA to fall US$50-80m and free cash flow to fall US$50-80m for the quarter.

• Serco (outsourcer): “There is limited necessity for travel of our employees, and given the nature of our services, we consider any supply chain risk to be small at the current time.”

• Sime Darby (Malaysian trading conglomerate) – The coronavirus outbreak is having a significant impact on group operations.

• Solvay (chemical company) – Coronavirus to affect 1Q profit by €25m: it’s too early to calculate full impact, according to the CEO.

• SSP (food service): “In terms of the impact at the airports in which we operate across the region, in China we have seen sharp declines in both domestic and international air passenger numbers, which are currently running c90% lower yoy. In Hong Kong passenger numbers are c70% lower yoy and across a number of our other Asia Pacific countries, including Singapore, Thailand, Taiwan and the Philippines, passenger numbers are between 25-30% lower yoy. Elsewhere, we have also seen some impact at our airports in Australia, as well as at major travel hubs in the Middle East and India, although to date this has been less severe. “In response to the sharp fall in sales in China and across the Asia Pacific region, we have been working with our clients to maintain appropriate service levels, whilst taking all the necessary action we can to reduce costs, including the temporary closure of units and reduced operating hours. In terms of the financial impact of COVID-19, our expectation is that for the month of February sales across the Asia Pacific region (which accounts for approximately 8% of SSP Group revenues) will be approximately 50% lower yoy. Together with the impact in the Middle East and India, this is expected to reduce overall group revenue in February by approximately £1012m, with a corresponding reduction in operating profit of approximately £4-5m.”

• Suez (water waste treatment) – The restart of six Chinese plants will be gradual, according to the CFO. “Progressively we’ll start to see volumes go through those incinerators in Q2. We don’t expect to be back at full capacity on 1 April.” Virus is expected to reduce EBITDA by €30-40m in Q1.

• Toyota has cancelled all non-urgent travel for employees in Japan.

• Unite (student accommodation) – “We continue to monitor the situation regarding the outbreak of the coronavirus and its potential impact on reservations for summer 2020 and the 2020/21 academic year, and we are working on mitigation plans if required.”

• Virgin Australia – Coronavirus could affect by A$50-75m in the six months to end June.

• Weir (engineering): “Looking to the year ahead, there is uncertainty over the impact of the coronavirus (COVID-19) on the global economy and demand for natural resources. Assuming underlying demand does not change, we expect further good constant currency growth in our mining-focused businesses to be offset by the continued challenges in North American oil and gas markets.”

• Weibo (social media) – “For Q1 2020, Weibo’s business has been significantly impacted by the coronavirus outbreak in China. Due to the high uncertainty of the evolving situation, we have limited visibility on the full quarter revenue impact brought upon by the epidemic. Based on our current best estimate, Weibo anticipates its Q1 2020 net revenues to decrease by 15-20% yoy on a constant currency basis. This forecast reflects Weibo’s current and preliminary view, which is subject to change.”

• Woolworths Australia (supermarket) – Stores with a high proportion of Asian customers have been hurt by COVID-19, with sales of infant milk formula falling significantly. Woolworths has experienced delays of some products due to the coronavirus and is short of hand sanitiser and wipes, but the direct exposure to China is low.

• Italy vs Ireland Six Nations game postponed due to the Italian coronavirus outbreak.

• China – Reducing power prices by 5% for industrial & commercial users until the end of June.
• Hong Kong – Launching a HK$10,000 handout for residents over the age of 18 to stimulate. The measures are expected to cost HK$71bn and benefit around 7m people.
• Kuwait's civil aviation authority has announced the suspension of all flights to Singapore and Japan over coronavirus fears.
• Samsung Electronics said this morning it would give Won23bn (US$18.9m; £14.6m) to “support relief efforts for individuals and communities” affected by COVID-19.
• The UK Foreign Office has advised against all but essential travel to 11 towns in Italy.
• Dailain City, a major port in South Korea, has imposed restrictions on visitors as the virus spreads.
• Luftwaffenkaserne Wahn air base in Cologne is in lockdown after a service member came into contact with a critically ill patient with suspected coronavirus.
• Iranian police have arrested 24 people accused of spreading rumours about the coronavirus online, a further 118 internet users were “talked to and let go” with warnings, the head of Iran's cyberpolice force Vahid Majid said.
• A staff member at the UN’s office in Vienna, Austria, has suspected coronavirus, the UN has announced. The person has been taken to hospital for testing, and four people close to the individual have been asked to self-isolate.
• Facebook is prohibiting adverts that promise cures or guaranteed preventions against the virus. Search for coronavirus information on Instagram, owned by Facebook, and an alert pops up directing you to the World Health Organisation website.
• The Indonesian Financial Services Authority has said it will relax rules on credit restructuring for sectors affected by the outbreak.

#Peel Hunt Corporate Client