Coronavirus - Track or Trust

From Saturday, people returning to Germany from countries with a high risk of coronavirus will have to undergo tests on arrival.

The free tests had been offered to such returnees on a voluntary basis from last week, but will now be mandatory. In contrast, the equivalent travellers arriving in the UK are required to self-isolate for 14 days; this relies on honesty and is hard to enforce, it is also less efficient. A negative test result would allow travellers to shorten the periods they are required to isolate. Testing capacity and speed has improved in the UK, but the value of further improvements should not be underestimated.


• BoE estimates UK GDP will fall 9.5% in 2020, better than the 14% initially forecast.

• German cases rise to their highest level since May.

• Italy threatens to ban Ryanair over virus ‘violations’.

Company news

Buildings & Construction

 Savills – “Covid-19 has had a significant impact on the world's real estate markets. As a global business Savills has had to navigate market disruption from its early onset in the Asia Pacific region through its progressive spread across the world. The impact of lockdowns, including the prohibition on site viewings, has significantly reduced the volume of transactional activity that could be conducted.

In the six months to 30 June 2020 Savills delivered revenue of £791.4m, a decrease of 7% (same decline in constant currency) (H1 2019: £847.0m). Underlying profit was £13.2m, 66% lower than the first half of 2019 (H1 2019: £38.4m) (same decline in constant currency). The Group's underlying profit margin was 1.7% (H1 2019: 4.5%).

In the context of the significant impact of Covid-19 on global markets in the second quarter, Savills resilient interim results highlight the diversity and strength of our Global business. During this period, our less transactional businesses have provided a solid platform for the Group and our transactional business teams have partially mitigated the effect of significantly lower levels of trading activity by winning increased market share. Much of this is due to our strategy of remaining open for business throughout, retaining the strength of our teams and focussing resolutely on addressing both the pandemic-related, and longer term, needs of our clients.

In recent weeks we have seen signs of recovery in residential markets and a number of commercial transaction markets around the world. Clearly, our performance in the second half of 2020 will be highly dependent upon the extent to which such signs become a sustained recovery for the markets in which we operate.”


 ConvaTec – “As we expect a number of factors that drove a positive impact in the first half to reverse in the second half, we are maintaining our 2020 guidance of 2.0% to 3.5% constant currency1 revenue growth and between 16% and 18% constant currency1 adjusted EBIT margin2, whilst remaining cautious about the risk of Covid-19 related disruption.

We expect the impact of reduced elective surgeries and lower non-surgical volumes as well as the unwinding of customer inventories to continue in the second half. In addition, whilst we expect to achieve good growth in Continence and Critical Care, we expect the higher, first half Covid-19 related demand to reduce, and there to be a negative impact from portfolio rationalisation in Ostomy Care. In addition, strategic transformation investment will increase in the second half, alongside a return to higher expense levels as the impact of Covid-19 reduces.”


 Mondi – “Revenue was down on the comparable prior year period due to lower average selling prices across our key paper grades more than offsetting good volume growth in Corrugated Packaging and Flexible Packaging. Uncoated fine paper volumes were impacted by lower demand for commercial, professional and office printing as a result of the widespread lockdown measures.

Going into the second half of 2020, heightened macro-economic uncertainties remain. Pricing across our key pulp and paper grades is below or in line with the average of the first half. Demand for packaging daily essentials remains robust while we continue to see weakness in certain industrial end-uses. Uncoated fine paper order books have picked up from the lows seen in the second quarter, albeit we do not expect a near-term recovery to pre-pandemic levels. We have rescheduled planned mill maintenance shuts which will have an impact on the second half of the year.”

 Synthomer – “In a period of challenging economic activity, the Group delivered H1 2020 Underlying EBITDA of £100.2 million, in line with the H1 2019 of £99.7 million. We reported that the Group was making good progress in Q1 2020 with our EBITDA at £45 million 5% ahead of the 2019 comparative period results. Whilst Q2 2020 was affected by Covid-19, the H1 2020 Underlying EBITDA reflected a robust performance of the heritage Synthomer business of £92.3 million, just 7% down on the comparative period, and the EBITDA contribution from OMNOVA of £7.9 million.

The return to more normalised trading seen in June has continued through July. Following detailed discussions with stakeholders in each of our markets, and subject to continued progress, we are confident that the second half of the year will see a sustained return to more normalised Group EBITDA levels. As a result, we now expect full year EBITDA to be broadly in line with current market consensus* and accordingly the Board expects to pay a full year 2020 final dividend.”

TT Electronics – “Group revenue was £210.0 million in the period with organic revenue 14% lower. Underlying operating profit was £11.4 million, down 41 per cent at constant currency, largely reflecting Covid-19 disruption and inefficiencies. After the impact of adjusting items including restructuring, the Group's statutory operating loss was £2.9 million. All our manufacturing sites are open and gradually returning to full capacity.

Our current expectation is that we will see improvement in the second half. There remains a range of possible outcomes for the year and, in light of this, our intention is to recommend a dividend at the year-end taking account of our performance for the year as a whole.”

 Vitec – “Although the pandemic has had a significant short-term impact on customer demand, and the structure of our markets will change, we have seen some areas of growth. We are confident that our end market drivers are just as relevant, or potentially even more relevant, as people are consuming, capturing and sharing more content than ever before. More people have become accustomed to communicating via video on smartphones and watching more scripted series on online platforms. In addition, new social distancing guidelines are expected to drive demand for near-set and remote monitoring, robotic cameras and voice-activated prompting. Vitec is well placed to benefit over time from these structural market changes, for example with continued growth in JOBY smartphonography accessories and the launch of our 4K eco-system of wireless video products in the cine market.

We expect our end markets to recover and for us to come through this period with an enhanced competitive position, well placed to return to growth. Although the pace and shape of the recovery in our markets is hard to predict, and it remains difficult to provide financial guidance for the full year, we currently expect trading conditions to continue to significantly improve.”


 Aviva – “Our businesses began the year strongly and adapted well as Covid-19 caused disruption to our customers. The impact of Covid-19 was broad-based and affected new business volumes across many markets and products, particularly during the second quarter when lockdown measures were at their most extreme. However, our digital capability, well-developed home-working structures and long-term relationships with customers and distributors meant the effect on our performance was manageable.

Covid-19 also required us to adapt our approach to efficiency initiatives. While some projects planned for this year were deferred or cancelled and overheads were reduced in areas including travel, expenditure increased to accelerate remote working capability and we contributed £43 million towards community support initiatives. At our full year results, we indicated our expectation that in-year cost savings relative to the 2018 baseline would be £150 million including absorbing inflation: based on our first half trends, we expect to beat that estimate.

However, we are under no illusions that the Covid-19 challenges are behind us. We are all still living with Covid-19 and a return to normality is likely to remain some way off. The recent global economic downturn is unprecedented and the fiscal response by Governments around the world has been extraordinary. As protective measures are eased and Government support withdrawn, economic headwinds and capital market volatility are likely to persist. As a result, any recovery in customer activity is likely to be gradual and we will continue to be prudent in managing our businesses and capital resources.”


 ITV – “While our two main sources of revenue - production and advertising - were down significantly in the first half of the year and the outlook remains uncertain, today we are seeing an upward trajectory with productions restarting and advertisers returning to take advantage of our highly effective mass reach and addressable advertising platform, in a brand safe environment.

Productions are now restarting and with the efforts of our Commercial sales team, we are having more positive conversations with advertisers and seeing some signs of improvement in advertising. Given the level of uncertainty for both ITV Studios and Broadcast it is not possible to provide financial guidance for Q3 or the remainder of the year.

The Board continues to monitor performance against a wide range of scenarios as well as internal and external analysis to inform its planning and decision making and will continue to manage our costs and cash appropriately.”


 Glencore – “Our Industrial activities faced numerous challenges, but for the most part were able to continue operating relatively normally. Unit costs are broadly stable (pre by-product credits), while capex is under close control. In the current economic environment, difficult decisions and actions have been considered for moving certain assets into extended care and maintenance to rebalance markets with oversupply risk and preserve the resources for a better market environment. Impairments of $3.2 billion (net of non-controlling interests and tax) were recognised.

The outlook remains uncertain in the short term. Notwithstanding our cash-generative business and secure liquidity positions, the Board has concluded that it would be inappropriate to make a distribution to shareholders in 2020, instead prioritising the acceleration of Net debt reduction to within our target range (<$16 billion), currently expected to occur by the end of 2020.”

Real Estate

 Hammerson – “Prior to Covid-19, Hammerson was delivering against its strategy of reducing debt, progressing disposals, and making significant steps to shift the brand mix to better reflect customer demand. Covid-19 has had an adverse impact on the Group's operational and financial performance. The Board has taken the decision to undertake these significant transactions, enhancing Hammerson's strategic and financial flexibility, supporting the delivery of a more focused portfolio of flagship destinations and over the medium term its City Quarters development opportunities.

The extraordinary disruption caused by Covid-19 on the retail property sector, the economy and society as a whole is reflected in these half-year results, however, in recent weeks we have seen an encouraging increase in footfall as confidence begins to return amongst visitors to our flagship destinations.

The pandemic has exacerbated structural shifts in retail, exerting further pressure on both property owners and brands, and provided further evidence that the UK's historic leasing model has served its time. It is outdated, inflexible and needs to change. We are introducing a new UK leasing approach - one that is simpler, reflects an omnichannel retail environment and rewards positive performance on both sides. It will deliver a sustainable, growing income stream and we are in initial discussions with retailers and anticipate introducing the first of the new leases later this year.”

 Tritax Big Box REIT – “While Covid-19 remains a live issue and is impacting the UK economy, our sector remains resilient and our portfolio continues to collect a high proportion of rent. In line with our expectations, full year 2020 financial performance is likely to be weighted to the second half of the year as the positive impact from our development portfolio is realised. Incremental rent from developments such as Littlebrook will in part be offset by anticipated disposals as we effectively recycle capital into higher-returning opportunities within our portfolio. We are at an advanced stage on a number of disposals and expect to complete several by the end of the financial year.

The outlook for logistics real estate remains strong and increasingly positive. Occupational and investment demand has remained elevated with the Covid-19 pandemic appearing only to accelerate the tailwinds that have benefitted the sector in recent years. Despite these positives, it is prudent to maintain a cautious outlook on the longer-term impacts from Covid-19, particularly in the face of a potentially deep and protracted recession.”

 Warehouse REIT# – “As at 30 July 2020, 94% of contracted rent due on the June 2020 quarter date had been received or is being collected monthly, with ongoing discussions continuing for the balance. The Company is taking a proactive approach towards collecting rent and has agreed to monthly in advance payments amounting to 27% of the contracted rent, of which, 60% has already been received.”


 Joules# – “Group revenue decreased by 12.5% to £190.8 million (FY19: £218.0m) adversely impacted by Covid-19 and the previously reported e-commerce stock availability issue over the Christmas trading period • Revenue impact of Covid-19 in the final quarter is estimated at c£31 million4

• E-commerce performed well with Joules' own e-commerce channel revenue up c11% for the year

• E-commerce represented nearly 57% of retail sales (FY19: 49.5%). For the first nine months, pre-Covid-19, it represented nearly 51% of retail sales

• Store revenue declined 21.4% for the year. Over the first 9 months, pre-Covid-19, store sales declined c8%, reflecting structural industry trends and reduced promotional activity

• Wholesale revenue declined 25.3%, with the final quarter experiencing a reduction of c75% as wholesale customers globally closed their operations in response to Covid-19

We are pleased to report that we have performed ahead of the Board's Covid-19 base case since the UK entered lockdown in terms of both trading and the Group's liquidity position. As consumers and businesses begin to emerge from the initial shock of the pandemic and into the 'new normal', we are under no illusions that the impact of the pandemic on businesses, communities and consumer confidence will be felt for some time to come.

On 15 June we were pleased to commence a phased re-opening of stores after a near three-month period of closure. Whilst it is still early in the process to fully predict to what extent store footfall and sales will recover, we remain confident that the Group's flexible and agile 'Total Retail' model puts Joules in a strong position to be able to adapt to the way customers choose to interact with our brand going forward. Across our portfolio of 128 stores, a large proportion are in 'lifestyle locations' and more than a third of our portfolio has a lease event within the next 18 months, with an average lease length of less than three years. We will continue to review the appropriate shape of our store portfolio and lease agreements.

Macro-economic uncertainty looks set to continue across the Group's key markets over the coming months and this will have an inevitable impact on consumer confidence and spending. Against this backdrop, the Group intends to continue to tightly manage its cost base until there is better visibility of sustained demand recovery across the Group's channels.”

 Naked Wines – “As at 30 July 2020, 94% of contracted rent due on the June 2020 quarter date had been received or is being collected monthly, with ongoing discussions continuing for the balance. The Company is taking a proactive approach towards collecting rent and has agreed to monthly in advance payments amounting to 27% of the contracted rent, of which, 60% has already been received.”

Support Services

 Serco – “The Covid-19 pandemic has had a small net financial impact on our business so far, but this does not reflect the effect it has had on us operationally. It has caused large fluctuations in demand for some of our services, placed huge pressure on our employees, especially those working on the front-line, and introduced new complexity into both how we manage our supply chain and deliver our services. The business has shown remarkable agility and effectiveness in response to this intense pressure. Much of this has been made possible by the significant investments we have made in people and systems in the last few years. While working hard on navigating these immediate challenges we are also planning for the longer term implications for our business, both in terms of operational delivery and customer demand.

Short-term outlook

We are maintaining our guidance for 2020 as re-instated in our trading update on 17th June, namely: we expect Revenue to be around £3.7bn (2019: £3.2bn), and Underlying Trading Profit of £135-£150m (2019: £120m); other elements of guidance are shown on page 2 of the statement. The relatively wide range of UTP outcomes reflects the continuing uncertainty, which we think, is likely to persist well into 2021 as the world grapples with recurring outbreaks of infection. We are already seeing in Australia and in North America that these secondary upsurges are hard to contain and can have a disruptive impact on workplaces, which in turn can affect both our revenue and profit. It is also worth noting that our guidance for profits in 2020 has stayed at levels similar to our pre-pandemic expectations mainly because of our success in winning enough work from governments to support their Covid-19 response to offset the significant negative impact of the pandemic in other parts of our business. These contracts are by their nature short-term, which means they are unlikely to continue much into 2021. The variable nature of this work introduces a greater degree of near-term risk in our planning.

Medium-and-long-term outlook

It is a truism that the global economic and human catastrophe brought about by Covid-19 is likely to have a dramatic impact on the way we all do everything; some say that no stone of our lives will be left unturned, and nothing will ever be the same again. We take a more nuanced view as far as our business is concerned and are inclined to believe that in the long term more will stay the same than will be different.

First, it is true that recent experience might make some governments consider doing more in-house rather than outsourcing service provision. We do not think that this will happen meaningfully, in part because the private sector has responded extremely well to governments' emergency requirements: thousands of ventilators have been delivered, tens of millions of items of PPE have been manufactured, massive additional hospital bed capacity built, vaccine development accelerated. For our part, we have stood up drive-through test facilities in two days; recruited 10,500 tracers in four weeks, provided accommodation for more than 1,300 quarantined travellers in five days, found accommodation for 2,700 asylum seekers. These successes in delivering critical public services will, hopefully, remind governments of the value of resilient, robust supply chains who can support them in both ordinary and extra-ordinary times.

Second, for many people reading this report, the most memorable thing about the impact of the crisis on our work life has been the discovery that, thanks to the wonders of modern IT, we can work quite effectively from home and don't need to spend hours every day commuting; this will surely drive fundamental changes in office-based work. But in Serco, around 90% of our colleagues work on the front line in prisons, call centres, hospitals, defence establishments, trains or ferries. From your kitchen table you cannot make a patient's bed, or unlock a wing, or tow an aircraft carrier into port, and we don't see demand for these services, in aggregate, diminishing. We therefore do not see a lot of change in our basic business model of offering public services delivered by people supported by good systems and processes.

What of our customers? As far as governments themselves are concerned, the only things we know for sure are, first, that they will be massively more indebted than they were before the crisis, and that, secondly, citizens will be more conscious of the contribution that public services make to their quality of life. The chorus of the "Four Forces", which we have previously described as driving demand for our services will, we think, have been amplified by the crisis: increasing and changing demand for public services; heightened expectations around the quality and resilience of public services; increased fiscal deficits; the dire political consequences of increasing taxes. These will continue to drive governments to want to deliver more public services, of higher quality, for less money. We believe that this imperative to provide more, and better, for less will become even more urgent in the years ahead, and to deliver those objectives governments will need the skills, resources, innovation and nimbleness of the private sector.

Other things that will not change: most of our contracts have low margins, but make a respectable return on capital because they have very little capital employed and risk should not be extreme; demand, in aggregate, is unlikely to diminish for years ahead; there will always be some customers who are unreasonable or who want to transfer unmanageable risk, but we have the choice to say no; government policy can sometimes seem fickle and perverse, but our international footprint enables us to shift our investment in bidding to focus on the best opportunities; bidding costs are high, but the resulting contracts are both large and long term; we carry large forward order-books.”


• The UK economy faces a less severe downturn than feared according to the Bank of England. Initial estimates suggested the UK economy would contract by 14% in 2020; now the Bank expects the economy to shrink by 9.5%.

• There is growing speculation that the re-opening date for indoor pubs in Northern Ireland that only sell alcohol will be delayed. The chief medical officer has advised that so-called ‘wet bars’ should not re-open on Monday as planned.

• There has been a surge of interest in moving to the country due to city dwellers’ priorities changing during the coronavirus lockdown according to Rightmove.

• Germany makes tests mandatory for returnees from ‘high-risk’ countries from Saturday. The rule includes travellers of all nationalities coming from most non-EU states (except the UK), as well as parts of Spain and Luxembourg.

• Belgium is set to become the latest country added to England’s quarantine list after a rise in cases, meaning arrivals will have to isolate for 14 days.

#corporate client of Peel Hunt