Coronavirus - West Side Story

Washington state reported the first COVID-19 case in the United States on 20 January. Given the subsequent lethargic response and ineffective testing in the US, the virus could have been circulating in the state for six weeks. Hundreds could already be infected, giving the virus a springboard into the country. California has now declared a state of emergency after its first death from the virus and its cases reached 53. Other states are likely to follow suit.

• California – Has declared a state of emergency.
• Spire – Has warned of “plausible breach of banking covenants”.
• Hyve – Events postponed/cancelled and reduced attendees.
• PageGroup – Expects a significant impact in March.
• LSE – No longer letting people from France or those recently in contact with travellers from France into Paternoster Square.
• New Jersey – Announced first case.
• Canada – 50bp cut in interest rates.
• HSBC – Evacuated part of its Canary Wharf trading floor & research.
• South Africa – Reported first case.
• Switzerland – First death.

Company news
• American Eagle Outfitters (fashion retailer) – Does not anticipate near-term supply chain issue. 100% of the company’s factories are back in operation and are running at 75% capacity.

• Coats# (thread manufacturer) – “The impact for Coats to date has been in our China business which currently represents approximately 12% of group sales, and four of our 50 global manufacturing facilities are in the country. These four facilities are now operational following the enforced government closures after the Chinese new year with the majority of our employees now back at work. We are in the process of returning the four facilities to full capacity, which we expect to happen by the end of March. Following the temporary shutdown of our facilities we have seen an $8 million year-on-year reduction in our China sales in the first two months of 2020. China remains important to the wider A&F supply chain, producing around 40% of the world’s garments and footwear. Looking forward we face uncertainty around the impact of the virus on the industry supply chain, both inside and outside of China. We will continue to monitor the situation carefully and respond as necessary. Coats has an unrivalled global footprint and is uniquely placed to help brands and manufacturers as they look to further de-risk their own exposures to the largest sourcing market of China by moving incremental production volumes to alternative locations.”

• Diamond Shipping (oil transportation) – Coronavirus has had a significant impact on global commodity trade and specifically end-market demand from China.

• Foxconn (electronics manufacturer) – Revenue reduced by 18% in February.

• Finnair (Finnish airline) – Coronavirus affects the company significantly.

• Flybe (UK regional airline) – Goes into administration.

• Hugo Boss (fashion retailer) – Expects economic consequences of spread of coronavirus to have a significant impact, especially in the first quarter. “After a very good start to 2020, our business in Asia is currently being significantly impacted by the spread of the coronavirus. After a very encouraging start to the new year, more than half of the group’s around 150 points of sale in mainland China, Hong Kong and Macau have been closed since the end of January. The remaining points of sale mostly operate with severely limited opening hours and have experienced a significant decline in visitors. In addition, the company is currently recording a noticeable decline in sales in other key markets. Currency-adjusted sales in the Asia/Pacific region are forecasted to decline by a single-digit percentage rate.”

• Hyve (exhibitions and conferences) – “Postponement of Asian events – we have successfully managed to postpone four March events in Asia to later in our current financial year. Bett Asia will now take place in June, CWIEME Shanghai in July, BreakBulk Asia in August and CPHE (Shanghai's hosiery exhibition) in August. Unless the impact of the virus lasts until the rescheduled dates, these events will all still take place within our 2020 financial year; in particular for many of our Chinese customers who are either unable to leave their region of China or unable to enter certain countries, have started to adversely impact revenues at a number of our events. Shoptalk 2020, previously planned for March, has been postponed to September and will therefore remain in Hyve's 2020 financial year. While there is not currently a restriction on large events in the USA, it is clear that a significant number of US companies are restricting or discouraging all business travel for their employees, including conference attendance. This is impacting the number of key customers and speakers now able to attend and we consider, at this time, that it is not feasible to deliver a high-quality event in line with customer expectations. Moving Shoptalk to September preserves the quality of this year's event. As a result, we have taken the decision to move Groceryshop to March 2021 to avoid a clash with Shoptalk. Other than the specific examples above, all of our other events are currently expected to go ahead as planned. The situation is evolving on a daily basis, but Hyve continues to work hard to mitigate the impact that the coronavirus outbreak is having on our business.
On the basis of what we know today, we currently estimate a one-time adverse impact in FY20 of between £17m and £19m on the group's revenue and between £16m and £18m on group profit in the current financial year, as a result of the issues set out above. The current estimated financial impacts are as follows: Postponement of Asian events – c£1m on both revenue and profit; Outbound sales – c£7m to £8m revenue and c£6m to £7m
profit; and Postponement of Shoptalk and Groceryshop – c£9m to £10m on both revenue and profit, after incurring £4m to £5m of duplicative costs already incurred on the postponed editions that cannot be recovered.”

• JCDecaux (advertising) – Has warned its sales have been impacted by the outbreak looking at Q1 2020. “We expect our adjusted organic revenue to be down around -10%, despite positive current trading in Street Furniture, reflecting the very material impact from the COVID-19 outbreak and taking into account the Q1 2019 high comparable in transport. In Asia-Pacific, our business has been significantly affected since the beginning of February, with a very important decline in China in passengers and commuters in the airports and metros where we operate. All our landlords in China fully recognise the significant setback for the advertising business and have all already expressed their intention to grant us rent reductions. During the past few weeks, we have been talking to our clients / advertisers and we are supporting them with exceptional temporary reliefs. Regarding Travel Retail, most of our clients want to keep their premium locations and their long-term commitments in our airports. Given the magnitude of the COVID-19 disruption, our group operating margin should be negatively affected in 2020, despite saving measures being implemented without compromising our operational quality and efficiency, to mitigate the impact. With strong and effective measures notably taken by the Chinese government, a rebound of the economic growth could pave the way for a recovery with consumption and investment activities resuming, once the epidemic is under control.'

• JetBlue Airways – Has reduced capacity by c5% to address fall in demand due to the virus outbreak.

• Mandarin Oriental International (hotels) – The group’s performance is being significantly impacted by the ongoing coronavirus outbreak, particularly in Hong Kong.

• Melrose – “10% of group sales are manufactured in China, of which only 5% is sold in China. GKN Automotive has the largest exposure through its SDS joint venture, but all except one site are operational after the new year break. Whilst there is clearly going to be a material impact on the Chinese economy, at the time of writing there are increasing signs of a return to normal levels of production.”

• Myer (Australian department store) – Anticipates challenging macro environment will continue into the second half of the year in relation to COVID-19.

• Norwegian Air – “Given the uncertainty and ongoing impact on overall demand for air travel, Norwegian withdraws its 2020 guidance provided to the market on February 13, 2020. Have cancelled 22 flights between Europe and the US due to reduced demand on some routes resulting from the COVID-19 virus.”

• PageGroup (recruitment) – “The slowing growth that we saw in the second half of 2019, caused by a number of macro-economic challenges, have continued in the first two months of this year. In addition, we have seen the emergence of COVID-19 in Greater China. This, combined with the existing challenges, led group gross profit to decline by -3% in these first two months. In our market-leading Greater China business, where COVID-19 first emerged, we have around 550 people across nine offices, we reacted swiftly in challenging circumstances, recognising that the health and safety of our employees, candidates and clients was our top priority. With consultants continuing to work via home access, we were able to maintain contact with both candidates and clients. After periods of office closure in some cities, we had over 90% of consultants back in our offices by the end of February. Business was transacted using a range of technologies and while there was almost no face to face contact, in the first two months we were still able to deliver gross profit at c65% compared to 2019. Looking forward, in Greater China, many of our clients have not been able to return to work with the same speed and therefore we expect a significant impact in March, one of our largest months of the year, and potentially beyond. With COVID-19 now impacting other markets around the world, it is too early to estimate the impact on the group's operations. We will continue to monitor the situation closely and will provide updates as necessary.”

• Saga (travel) – “For our Cruise business, bookings until recently have been very strong, with forward sales for the current year of 80% of the full year revenue target as of 29 February. The remaining 20% of our full-year revenue target is weighted towards Q3 and Q4 2020 cruises. While we have seen a higher level of cancellations for departures in the near-term and more generally a lower level of bookings for departures further out, our two most recent departures had load factors of around 80%. The Cruise business continues to only depart and return to UK ports and we have flexibility on destinations visited. Our Tour Operations businesses have experienced an
increase in cancellations and suppressed demand in line with the industry. Forward passenger bookings for 2020/21 were down around 20% versus the prior year, with a more significant impact in recent weeks. However, given our
relatively low level of cost commitments and lower exposure to Northern Europe and Far East destinations we are able to react to changes in demand and flex elements of our cost base for the remainder of the year.”

• Skyworks (wireless semiconductors) – “The company now expects for the second fiscal quarter of 2020: Revenue between $760 million and $770 million, compared to the prior outlook of between $800 million and $820 million; Non-GAAP diluted earnings per share of $1.34 at the midpoint of the updated revenue range, compared to the prior outlook of $1.46 at the midpoint of the prior revenue range. Although COVID-19 has caused no significant disruption within Skyworks’ manufacturing operations to date, the current demand environment for our products has been negatively impacted by interruptions in global supply chains.”

• Southwest Airlines – “In recent days, the company has experienced a significant decline in customer demand, as well as an increase in trip cancellations, which is assumed to be attributable to concerns relating to reported cases of COVID-19. Based on these recent revenue trends, which are currently expected to impact the remainder of March 2020, the company now estimates its first quarter 2020 operating revenues to be negatively impacted in the range of $200 million to $300 million, and RASM to be in the range of down 2 percent to up 1 percent, year-over-year, as compared with its previous guidance of a year-over-year increase in the range of 3.5 to 5.5 percent. Relative to previous expectations, the company’s cost outlook has improved, which is offsetting a portion of the estimated first quarter 2020 COVID-19 revenue impact.”

• Spire (private health) –“The group’s approach for assessing the impact of COVID-19 is based on the Government's Stretch Scenario as set out in their action plan published on 3 March 2020. However, the circumstances concerning COVID-19 are unprecedented and are impossible to accurately determine at this stage. It is plausible that a breach of banking covenants could arise without mitigating actions. Account has been taken of Government and Bank of England statements to support business and the UK economy.”

• Tyman (housing components) – “The situation regarding coronavirus is rapidly evolving and may create headwinds for our business in 2020.”

• Woolworths (Australia's largest supermarket chain) – Has limited the number of toilet rolls customers can purchase after coronavirus fears prompted a surge in buying.

• The producers of No time to Die, the Bond film due out this year, have decided to push the release date back from April to November.
• IBM’s Think 2020 has cancelled the public part of the event and will now be online only.
• England's Six Nations games against Italy set to be postponed. This includes both the men’s and women’s fixtures.

• California has declared a state of emergency as cases in the state rise by 30 to 53. On Wednesday, California Gov. Gavin Newsom made the declaration in order to receive emergency federal funding to battle the coronavirus.
• Australia has banned the arrival of foreign travellers from South Korea.
• The cruise ship The Grand Princess, is being held off the coast of California after a former passenger died of the virus. Around 3,500 people are on board.
• All passengers on board cruise ship MSC Opera are having to stay on the ship after a former passenger tested positive. The ship has docked in Piraeus, the port city near Athens.
• The International Monetary Fund has announced $50bn (£39bn) of support for countries hit by the coronavirus.
• The United Arab Emirates has told citizens and foreign residents to “avoid travel” anywhere abroad because of the coronavirus outbreak.
• Deutsche Bank now expects UK growth in 2020 to drop to 0.5% as a result of the virus.
• UK health officials have moved into the second phase “delay” of their response to the coronavirus outbreak.
• HSBC has sent home staff from one of the floors of its Canary Wharf offices. Employees in the bank’s research department have been told to work from home after a staff member returned from travelling in China and was diagnosed with COVID-19.
• The LSE has added France to its self-declaration policy at Paternoster Square, adding it to the list of other countries already declared including China, Hong Kong, Singapore, Japan, Republic of Korea, Thailand, Taiwan, Malaysia, Macau, Iran, Vietnam, Cambodia, Laos, Myanmar, Italy and Germany.
• The Bank of Canada cut interest rates by 50bps to 1.25%, stating that COVID-19 has presented a “material negative shock to the Canadian and global outlooks”. It said domestic growth in the first quarter would probably be weaker than it initially expected.

#Peel Hunt Corporate Client