Coronavirus - Rebasing

As markets look for a support level, companies need to ‘rebase’ as the scale of disruption becomes more obvious. Emerson Electric is an interesting example: after updating on 13 February, it has now increased its forecast for the impact materially. Businesses are addressing the risk with travel bans, exacerbating any economic impact. With the outbreak spreading, authorities will have to consider whether imposing restrictions has more impact than letting the virus spread. Company risk committees are likely to take a very different view than previously; when the recovery does come, it will not be business as usual.

Cases: 1,283
Deaths: 58

Cases: 83,385
Deaths: 2,858

Company news
• Amadeus (travel IT): “The coronavirus outbreak will impact our industry and our business in 2020, with a sequential rebound, if it replicates past episodes… Beyond the coronavirus outbreak, we are confident that we are well positioned to continue delivering growth in profits and cash generation into the future.”

• Baidu (Chinese search engine) said its sales will fall in Q1 2020. Warning that revenues would decline by 5-13% compared with last year. “Most shops, restaurants and malls across China were closed down, and many remain closed down as we speak, so consequently the rebound for online marketing after the Chinese New Year has been slow this year.”

• Benchmark Holdings (aquaculture): “The company is monitoring the potential impact of the coronavirus on its business. To date, the coronavirus has led to a suspension of shrimp imports to China, affecting shrimp producers principally in Ecuador and India. In addition, shrimp production in Vietnam and Thailand has decreased as a result of preventative measures constraining activities and consumption across Asian markets has declined… So far the impact from coronavirus has been minimal, but we remain cautious given our exposure to the Asian end markets.”

• Big Lots (retail company) sees a challenging Q1 due in part to supply chain interruption caused by the coronavirus.

• Brussels Airlines (Lufthansa subsidiary) is to cut 30% of flights to Northern Italy for two weeks.

• ConvaTec (medical products) – Assuming the situation normalises in Q2 and the coronavirus outbreak is contained, the company does not anticipate any significant impact on its business.

• Deutsche Post (international courier): “The group had seen a very good start into the current year in January and was prepared for the usual effects round Chinese New Year in February when the measures of the Chinese government were introduced. Since then the business development in Post & Parcel Germany as well as in DHL Supply Chain and DHL eCommerce Solutions has only been marginally impacted by the corona crisis. In contrast, the group currently sees more significant effects for the DHL Express and DHL Global Forwarding divisions, where the business is particularly affected with regards to cross-border trade flows into and out of China. Group-wide the negative impacts of the corona crisis on group EBIT amount to around €60-70m for the month of February, compared to the initial internal planning.”

• easyJet: “Following the increased incidence of COVID-19 cases in Northern Italy, we have seen a significant softening of demand and load factors into and out of our Northern Italian bases. Further, we are also seeing some slower demand across our other European markets. As a result we will be making decisions to cancel some flights, particularly those into and out of Italy, while continuing to monitor the situation and adapting our flying programme to support demand. While it is too early to determine what the impact of the COVID-19 outbreak will be on current year outlook and guidance for both the airline and holidays business, we continue to monitor the situation carefully and will update the market in due course.

To help mitigate the impact from COVID-19 we will be focusing on delivering operational efficiency and cost savings across a number of areas of the business, including:
•Budget cuts in administrative areas and discretionary spend.
•Recruitment, promotion and pay freezes across the network.
•Postponement of non-critical project and capital expenditure.
•Offering unpaid leave and halting non-mandatory training.
•Working with third-party suppliers to further reduce cost.
•Aircraft reallocation for summer 2020.”

Emerson Electric(engineering products& services)has revised its guidance for the second time in two weeks. The company now expects the impact on revenue to be US$100-150m,wider than its previous estimate of US$75-100m.

Electrolux–Commented that some deliveries will be delayed.

Eventbrite(event management and ticketing website)has reported that it expects impacts on live events in the short term.The shares down 10% pre market.

Finnair(airline)issued a profit warning over the impact from the coronavirus epidemic, saying that its operating result this year was likely to be“significantly lower”than in 2019 and that it may need to lay off staff temporarily.

Golden Agri-Resources (Singaporean palm oil company)–The COVID-19 outbreak is expected to affect business sentiments and the company’s operating environment.

Harvey Norman (Australian home retail)–Potentially long lasting threat of exposure to coronavirus is expected to further dampen sales for the remainde rof 2020.

Hasbro(games& entertainment company)–coronavirus outbreak in the markets in which the company operates may have a significant negative impact on revenue profitability and business operations.

IAG (global airline group):“The earnings outlook is adversely affected by weaker demand as a result of coronavirus (COVID-19). We are currently experiencing demand weakness on Asian and European routes and a weakening of business travel across our network resulting from the cancellation of industry events and corporate travel restrictions. In Asia, flights to mainland China have been suspended.On 29 January, British Airways suspended its daily flight to both Beijing and Shanghai and Iberia suspended its three times weekly service to Shanghai on 31 January. In addition, some services on other Asian routes have been reduced. From 13 February, British Airways reduced its daily Hong Kong service from two to one. From 13 March, it will reduce its daily service to Seoul to 3-4 times weekly. Some of the freed-up long-haul capacity is being redeployed to route swith stronger demand. British Airways has announced additional flights to India, South Africa and the US, while Iberia is increasing capacity on US and domestic routes. Capacity on Italian routes for March has been significantly reduced through a combination of cancellations and change of aircraft gauge and further capacity reductions will be activated over the coming days. We also expect to make some capacity reductions across our wider short-haul network. Short-haul capacity is not being redeployed at this stage. The net impact of current flight cancellations and redeployed capacity is to lower IAG’s FY20 planned capacity by approximately 1% in terms of available seat kilometres to 2% for the year. Our operating companies will continue to take mitigating actions to better match supply to demand in line with the evolving situation. Cost and revenue initiatives are being implemented across the business.”

• IMI (British engineering company): “It is difficult to predict the ultimate impact the coronavirus will have on global supply chains and demand. Based on no worsening of the current situation, we expect H1 2020 organic revenues to be lower than H1 2019, given the end market weakness in the Factory Automation and Commercial Vehicle sectors. Our continuing business improvement initiatives are expected to enable us to maintain our margins in the first half of the year.”

• Jadason Enterprises (electronic manufacture) – Manufacturing activities and demand for goods & services is expected to be negatively affected in Q1 due to the coronavirus outbreak.

• Mylan (pharmaceuticals) expects some impact from the outbreak due to the global nature of the business, but its exposure to China is limited. It remains too early to predict any commercial impact to operations.

• Neophotonics (optoelectronic manufacturer) – Q1 2020 outlook includes $10m of estimated coronavirus related impact on revenue.

• Novacyt (coronavirus test): “The value of quotations has grown significantly as Novacyt is currently involved in active discussions with representatives from a number of countries which have an acute need for tests as part of their national screening programmes. Due to the high level of interest in the Primerdesign COVID-19 test and rapidly evolving nature of this outbreak, the company cannot predict with any certainty the conversion rate of these ongoing enquiries into orders. Primerdesign has also signed its first major distribution agreement for the COVID-19 test with a global life sciences company to supply the test to two Asian territories outside mainland China. Initial sales, which are subject to local emergency use approval, are anticipated to be £2.1m (€2.5m) during the first six months of the agreement. It is expected that the first sales under this agreement will take place in March 2020. The company also announces that it has signed an OEM agreement with a US healthcare group for the manufacture and sale of its RUO coronavirus tests.”

• On the Beach(online travel agent): “The group experienced a small but noticeable reduction in demand for summer 2020 travel following the early reports of COVID-19 cases in early February. The reduction in demand has accelerated significantly following the increase in COVID-19 cases in Europe, particularly the spread of the virus to Tenerife. Whilst this reduction in demand has led to a natural reduction in marketing spend, the Board does not now expect the group to achieve payback in the current financial year on its previously outlined strategic marketing investment. With the expectation that the spread of the COVID-19 is going to cause significant disruption for a period of time, the Board believes that the group’s full-year results for the year to 30 September 2020 will be below current market expectations.”

• Pfizer – The spread of the virus could have an adverse impact on business and financial results. The company is seeing an impact on manufacturing, supply chain and clinical trials.

• Renold(machine industry company): “The extended shutdown in China due to the coronavirus outbreak and the subsequent disruptions to third-party supply chains into both the Chinese factory and the Australasian Chain business are now expected to reduce adjusted operating profit by c£1m in the year to 31 March 2020. The company’s Chinese factory has reopened but with ongoing disruption from staffing issues.”

• Shangri La Hotels – Outbreak of the coronavirus has adversely affected occupancy across the group’s hotels and resorts.

• ThyssenKrupp (industrial engineering and steel production): “The coronavirus has had an impact on our business in China, there is risk our supply chain will be disrupted.”

• United Company Rusal (world's second largest aluminium company) – Coronavirus will negatively affect aluminium market in China in H1 2020 with expectations of larger supply surplus and weak demand.

• The Geneva Motor Show has been cancelled after the Swiss Government banned gatherings of 1,000 people or more. The ban is effective immediately and runs at least until 15 March.
• Facebook cancelled its annual F8 Facebook Developer Conference, citing growing concerns over the COVID-19 outbreak.
• Pop group BTS cancelled its concert in Seoul in April because of virus concerns.
• A UAE Tour cycling event was abandoned after two Italian staff members of one of the teams taking part tested positive for the virus.
• Agnes B (French fashion house) has cancelled its Paris show in March.
• Food Expo in Athens delayed until May.

• UAE suspends passenger ferry services with Iran until further notice.
• Uzbekistan Airways is halting flights to Saudi Arabia’s Jeddah and Medina from today.
• Kuwaiti army suspends studies at military colleges and schools for two weeks from 1 March over coronavirus fears.
• Saudi Arabia is cutting supplies of crude oil to China by at least 500,000bpd due to the slow demand in the country.
• Port of Tauranga (NZ) log exports have been hit hard by the coronavirus. Full impact yet to be determined.
• JP Morgan issues a global travel curb to protect employees against the virus. The company has stopped all staff from non-essential travel to a range of destinations.
• Thai Central Bank said the economy is going to be weakest in Q1 and expects the impact to last 2-3 months. The economy might grow less than 1% if the outbreak lasts through the year.
• LSE – Certain travel restriction in place on staff and has given employees in certain jurisdictions options to work from home.
• Iran’s Health Minister says all schools in the country to close from Saturday to Tuesday.
• UAE – Two hotels in Abu Dhabi are under preventative quarantine over coronavirus concerns.
• The Governor of Hokkaido in the north of Japan has declared a state of emergency due to the coronavirus.
• Lebanon has barred entry to all non-residents travelling by air, sea or land from countries worst hit by the coronavirus. The government named China, South Korea, Iran and Italy.
• FDA: “A manufacturer has alerted us to a shortage of a human drug that was recently added to the drug shortages list. The manufacturer just notified us that this shortage is related to a site affected by coronavirus.”
• Nestle & L’Oreal have suspended business travel until at least mid-March.
• The Hong Kong Government said pets of coronavirus patients must be quarantined after a dog belonging to an infected person in the city tested mildly positive for the respiratory illness.

#Peel Hunt Corporate Client