Coronavirus - Worse but better

The WTO forecast that goods trade would shrink between 13% and 32% this year, more than in the global financial crisis.

However, unlike then, banks are not short of capital and the economic environment is in better shape. The recovery will depend on the duration of the outbreak, the effectiveness of policy responses and the willingness of countries to work together. While the duration is unclear, policy and co-ordination is very much in our collective hands. The WTO forecast a rebound in global goods trade of between 21% and 24%, if governments act effectively.


• A further 6.6 million jobless claims in the US.

• Emergency hospital visits fall to record low in England.

• Japan reports biggest daily rise in cases.

• The WTO forecasts a fall of between 13% and 32% in global trade.

• Wales’ Principality Stadium is being turned into a temporary hospital.

• Investment Association letter to FTSE 350 companies Link.

• Bundesliga set to play crowd free in May Link.

• Blackstone Real Estate Partners Europe VI €9.8bn final close Link.

Company news

Buildings & Construction

 Redrow #– “We are pleased to announce Redrow plc has been confirmed as an eligible issuer for the Covid Corporate Financing Facility (CCFF) with an issuer limit under the facility of £300m. The facility is currently undrawn.

Negotiations for the additional £100m of headroom under the Group’s existing Revolving Credit Facility (RCF) with its six relationship banks are progressing well and the documentation is expected to be concluded by the end of April. This will result in the existing RCF increasing from £250m to £350m. A further update will be provided in due course.

Meanwhile, we continue to take measures to proactively protect our cash flow. Currently around 80% of the workforce has been furloughed under the Government's Job Retention Scheme. On 27 March 2020, the Board and senior Directors in the business announced internally they had volunteered to take a 20% cut in salary for the duration of the crisis. Since then, the wider directorate in the business have also volunteered to take a salary cut of 20%.”


 First Derivatives – “To date we have seen no financial impact from the effects of Covid-19. All our services delivery is now being conducted remotely, with no impact on revenue. In our managed services and consulting business the services that we provided prior to Covid-19 are now being delivered remotely with utilisation rates in March 2020 remaining in line with the prior month. We continue to monitor developments closely through close and regular contact with customers across all the markets in which we operate.

Potential impacts and mitigation – Looking ahead, our conversations with customers indicate that in the near-term there will be a lengthening of software sales cycles, at least until the impact of Covid-19 is clearer. The Group is protected to some extent by the breadth of its sales pipeline across multiple industries and geographies, while further reassurance is provided by the repeat and recurring nature of the majority of our software revenue.

In consulting and managed services, we continue to benefit from high levels of repeat revenue from the ‘Business as Usual’ operations of our capital markets clients. We are monitoring the impact of Covid-19 on new business, particularly with regard to project work implementing change programs.

As the macroeconomic impact of Covid-19 continues to grow, the Group has conducted a scenario testing exercise with a range of assumptions including a severe, extended downturn in economic activity. Under all such scenarios the Group remains profitable and cash generative.

Notwithstanding the assurance provided by our scenario testing, the Group has taken a range of measures to mitigate any future potential impact of Covid-19, including suspending non-essential business travel and short-term deferral of the summer graduate intake. In addition, the Executive Directors will not receive a bonus payment relating to the financial year ended 29 February 2020.

In order to preserve the Group's liquidity during this period, the Board will not recommend a final dividend in respect of the year to 29 February 2020.

Liquidity – As at 31 March 2020, FD had gross cash available to it of £64m. This included £35m of funds drawn down on 24 March 2020 from the Group's available finance facilities, with the funds placed on deposit to provide further comfort on liquidity should conditions deteriorate markedly. The Group has a further £15m in undrawn revolving credit facilities available to it.

The Group has significant headroom on its covenants and taking into account the scenario testing and mitigating measures taken, expects that situation to persist through the impact of Covid-19, irrespective of its duration.”

 Livermore Investments Group – “The spread of the virus, government policy responses and changing demand patterns are expected to have a negative impact on the operations and earnings of some of the borrowers in the CLO portfolio. The Company has been in close contact with managers of its individual CLO positions and is tracking the level of rating downgrades of underlying loans to CCC+/Caa rating and a worsening default outlook. A significant concentration of CCC+/Caa rated loans can turn off the distributions to the equity and lower mezzanine tranches of CLOs and would result in significant drop in the market values of those CLO portfolio constituents. At this early stage it is not possible to quantify the impact, but further updates will be provided as more information becomes available. The full extent of the impact will depend on the length and severity of the crisis and is expected to vary widely between sectors and companies.

The Company has been positioned very conservatively for several months with high liquidity and cash reserves (in excess of USD 60m as of 31 March 2020) and a CLO portfolio that consists largely of CLOs with long reinvestment periods, which should benefit somewhat from the volatility in the market. The Company has no debt.”

 Polar Capital– “The coronavirus pandemic and oil price collapse brought an abrupt end to the longest bull market in history with the S&P 500 declining 34% over a four-week period to its low point on 22 March. A strong rally to 31 March followed unprecedented fiscal and monetary stimulus to ensure economies and markets continued to function. Polar Capital was not immune to this equity market volatility with our AuM decreasing by £1.9bn in the March quarter alone because of market declines.

Leading up to and throughout the period of lock-down as we invoked our business continuity plan and transitioned to entirely remote working it has been pleasing to witness the operational resilience of Polar Capital and its ability to continue servicing clients in a seamless manner. I am particularly pleased with the commitment of all our people, whose health and wellbeing are vitally important, as we have worked tirelessly to meet our investors' needs.

The support of our fund investors, clients and other stakeholders has been comforting and we have been pleasantly surprised by the initial limited quantum of redemptions when investors were raising cash to reduce risk in their portfolios.

Net outflows in the March quarter were £140m, of which £135m were from our alternative funds. Net flows were positive for the first two months of the quarter.

While AuM has decreased by 12% over the year and the equity bear market means we enter our new financial year with lower average AuM than the previous year, Polar Capital continues to be cash generative and is able to utilise its significant balance sheet to meet our operational and strategic objectives.

Despite market volatility in March and a rapid equity sell-off that exceeded that of the financial crisis, 55% of our AuM out-performed benchmarks in the March quarter.

We are comforted by the evidence of our operational resilience in these testing times and, together with our diverse and complementary range of fund strategies with proven track records, we remain well positioned to deliver compelling returns for our clients and shareholders.”

 UBS – “Following a request from FINMA, the UBS Board of Directors proposes shareholders approve that the previously announced dividend of USD 0.73 for the financial year 2019 will be paid in two instalments, a dividend distribution of USD 0.365 per share and the establishment of a special dividend reserve of USD 0.365 per share.

The Board of Directors intends to propose a special dividend of USD 0.365 per share after the publication of UBS’s third quarter results, subject to shareholders approval at an extraordinary general meeting.

We decided to comply with the request from FINMA even as UBS’s strong capital, funding and liquidity position enables it to support its clients and the economy while paying the dividend in full.”

Food, Drinks & Household

 Diageo – “‘Social distancing measures, including the closure of the on-trade channels, have been introduced in most of our markets. We are tracking changes in consumer behaviour during this time and adjusting our plans and resources in response.

In mainland China, we are beginning to see a very slow return of on-trade consumption, as restaurants and bars have started to gradually re-open. The significant impact on global Travel Retail, referred to in our 26 February update, has extended beyond Asia Pacific into other markets in March due to a steep drop in passenger numbers, as well as new travel restrictions imposed by many countries.

In North America, where the on-trade channel accounts for approximately 20% of US Spirits' net sales, most States closed bars and restaurants in March. In Europe, there have been significant closures of on-trade premises in most countries. This channel accounts for approximately 50% of Europe net sales, although the size of the on-trade channel varies significantly between individual countries. In both of these regions, we have seen some pick-up in the off-trade channel (retail stores) in recent weeks, although it is unclear whether this will be sustained.

In India, a nationwide lockdown has closed the on and off-trade channels, as well as production facilities across most industries, including United Spirits' supply operations, for an initial period of three weeks until 14 April 2020.

In our main markets in Africa, the on-trade channels have also been impacted, and we have closed two of our production sites in Nigeria. South Africa has imposed a nationwide lockdown for an initial period of three weeks until 16 April 2020. Governments have also placed restrictions on the on-trade in a number of countries in Latin America and the Caribbean. Cost mitigation and cash management – In the short term, we are reducing discretionary expenditure and reallocating resources across the group. As part of these mitigation measures, we are stopping A&P spend that will not be effective in the current environment. We are also tightly managing working capital and deferring discretionary capital expenditure projects. We are providing an appropriate level of support to our key suppliers and customers to ensure we are strongly positioned for a recovery in consumer demand.

Financial guidance – Given the global nature of the Covid-19 pandemic, and the uncertainty around the severity and duration of the impact across multiple markets, we are not in a position to accurately assess the impact of this on our future financial performance. We are therefore withdrawing our guidance on group organic net sales growth and organic operating profit growth for fiscal 2020.

Balance sheet and liquidity – We have a strong balance sheet and at 31 December 2019, our adjusted net debt to EBITDA ratio was 2.8 times. There are no financial covenants attached to our outstanding short or long-term debt.

We are taking actions to ensure we maintain good liquidity including, as previously announced on 24 March 2020, completing the issuance of new euro and sterling bonds totalling approximately £1.9 billion. We also have available the committed bank facilities of £2.8 billion, which are subject to a single financial covenant of a minimum of two times interest cover.”

 Warpaint London – “Prior to the Covid-19 lockdowns, the Group's current year trading to the end of February 2020 was at the upper end of the board's expectations. However, since the Company's last trading update announced on 19 March 2020, there has, as anticipated, been a substantial reduction in Group sales as a result of the lockdowns causing the closure of many of the Group's customer's retail outlets in the UK and its other markets. As a result, most customers are currently reducing, deferring or cancelling orders of all year round cosmetics. The Company continues to sell online and through those retail outlets stocking the Group's products that remain open.

In order to mitigate the impact of this, as far as possible, the Group has undertaken a number of significant cost cutting measures which include reducing non-essential spend, furloughing 84 of the Group's 115 UK staff whilst maintaining their salaries and participating in the UK Government's Coronavirus Job Retention Scheme, landlords agreeing to defer rental payments, and the suspension of all marketing, travel and other discretionary expenditure. Staff who have not been furloughed are primarily working on the Group's 2020 Christmas order book, which continues to build.

Outlook and Dividend – Given the ongoing uncertainty regarding the duration of the Covid-19 outbreak, the board is unable to provide guidance as to the financial outcome for the year ending 31 December 2020. Whilst it anticipates a significant fall in revenue in the current financial year, the board believes that, even if the current lockdown measures were to remain in place until the end of the year, the Group has the financial strength to withstand a disruption to its activities until at least the end of 2020 without the need to seek any additional funding. At 8 April 2020, the Company had cash of £3.3 million and hire purchase and term debt of approximately £500,000.

As announced on 6 February 2020, subject to audit, the Company expects to report revenue of £49.3 million and adjusted profit before tax (excluding amortisation in connection with acquisitions, share incentive scheme costs and exceptional items, which the board expects to total approximately £2.8 million) of £5.2 million for the year ended 31 December 2019. The board, under ordinary circumstances, would have sought to maintain its progressive dividend policy, but, in the interests of prudence given the considerable on-going uncertainty, and in order to further preserve the Company's cash resources, the board has resolved to not recommend a final dividend for the year ended 31 December 2019.”


 Silence Therapeutics– “Announces that it has repurposed equipment in its Berlin site to produce critical reagents for Covid-19 PCR diagnostic test kits, which are currently in short supply. We are doing this work on a cost only basis for TIB Molbiol GmbH, based in Berlin, and believe the use of our specialist equipment will significantly increase their capacity to produce test kits on short notice and with high demand for global distribution.”


 Airbus – “Airbus (stock exchange symbol: AIR) is now revising its production rates downwards to adapt to the new Coronavirus market environment.

In Q1 2020, Airbus booked 290 net commercial aircraft orders and delivered 122 aircraft.

A further 60 aircraft were produced during the quarter, highlighting the solid industrial performance, however they remain undelivered due to the evolving Covid-19 pandemic.

36 aircraft were delivered in March across the different aircraft families, down from 55 in February 2020. This reflects customer requests to defer deliveries, as well as other factors related to the ongoing Covid-19 pandemic.

The new average production rates going forward have been set as follows:

• A320 to rate 40 per month [from 60].

• A330 to rate 2 per month [from 3.3].

• A350 to rate 6 per month [from 10].

This represents a reduction of the pre-coronavirus average rates of roughly one third. With these new rates, Airbus preserves its ability to meet customer demand while protecting its ability to further adapt as the global market evolves.

Airbus is working in coordination with its social partners to define the most appropriate social measures to adapt to this new and evolving situation. Airbus is also addressing a short-term cash containment plan as well as its longer-term cost structure.”

 Avingtrans – “As reported in its trading update on 23 January 2020, the Group's order book and prospect pipeline remains robust. However, we are prudently taking immediate measures, in response to the unprecedented conditions affecting its markets, clients and businesses, to reduce its costs and protect its longer-term position, in order to mitigate the effects of near-term disruption. We have acted decisively to: • Protect the health and wellbeing of our employees and other stakeholders.

• Reduce near-term business costs by making appropriate use of UK and US government stimulus programmes, to maintain employment and capability.

• Conserve cash and liquidity, including the deferral of expected non-critical capex spend.

• Reconfigure our activities to support specific customers, at their request, in the critical national, or international interest

Business activity continues at most of our sites, with some 45% of our people still able to work safely in our factories. Specifically, we have been requested by certain UK, European and US customers to maintain production, which we are doing, although this leads to some short-term inefficiencies.

Therefore, 75% of our employees are able to perform their duties ‘normally’. However, business progress is being hampered by supply chain disruptions, travel restrictions and government enforced lockdowns in the UK, USA and India. As a result, 20% of our employees (mainly in the UK) have been furloughed at present and operations at the Group's Crown and Composite Products business units have been temporarily suspended. In addition, our aftermarket business is being disrupted by the inability of our service engineers and contractors to travel to customer sites.

Conversely, some market sectors are relatively unaffected – eg Power and Defence. Our Chinese units, in the first region to be severely impacted by the pandemic, are now back to normal levels of operation, with the majority of lost output expected to be recovered by year end.

The remaining 5% of our people are self-isolating at present, either due to experiencing virus symptoms themselves, or having family members who are affected.

Reducing Costs – Actions taken to reduce costs include:

• Cancelling all upcoming executive annual bonuses and pay increases.

• Reducing the salaries of the Board by 20% from 1 May 2020.

• Salaries of senior management and other employees are being kept under review, as the situation evolves.

• Furloughing 20% of staff, due to reduced activity levels in certain markets and aftermarket field service – notably oil and gas and construction.

Conserving Cash – Avingtrans has a modest level of debt and secured facilities with our banks. The Group’s net debt position has not moved materially since our interim results were announced in February. However, we must maintain our strong balance sheet and liquidity, position. As at 31 March 2020, the Group had headroom in its facilities of over £8m. The Group has strong, long-term relationships with its banks, who have indicated their on-going support.

Nevertheless, due to the current economic uncertainty, the Board believes it is prudent to take steps to conserve cash, including:

• Utilising government stimulus programmes where available, to support ongoing employment costs in the short term and so to avoid redundancies and maintain capability.

• Deferring non-critical capital expenditure for six months, including the Booth building extension.

• With the agreement of our Banking partners, taking a capital repayment holiday for three months.

• Continuing to seek on time stage payments from key customers to support working capital.

Current Trading and Outlook – Despite the widespread disruption caused by the pandemic, due to our mitigation actions above, we believe that the year ending 31 May 2020 (‘FY20’) will be broadly in line with previous management expectations for revenue and profit and our net debt is expected to be no greater than previous guidance.

Given the unprecedented uncertainty around the impact of Covid-19 however, it is not yet possible to assess with certainty the impact this will have on the Group’s financial performance for the next financial year. As such, the Group is withdrawing its previous guidance for the year ending 30 May 2021 (FY21).

Dividend – Notwithstanding the generally robust trading position and the Group's strong balance sheet, the macro economic environment is one of heightened uncertainty. After due consideration, the Board has decided to cancel the interim dividend for the 6 months ended 30 November 2019. The Board recognises the importance of dividends to shareholders and, as such, it intends to consider the appropriateness, quantum and timing of a dividend payment relating to the financial year ended 30 May 2020 when it has a clearer view of the effects of Covid-19 on the Group's business.”

 Mondi – “The Group delivered a robust performance, in line with expectations, during the first quarter of 2020. Underlying EBITDA of €385 million was 18% below the comparable prior year period (€471 million), driven mainly by lower pricing across our key paper grades mitigated by lower input cost and our ongoing cost reduction programmes. Underlying EBITDA was in line with the fourth quarter of 2019 (€381 million).

Our order books held up well in the first quarter, strengthening in consumer and e-commerce end-uses across our packaging and Engineered Materials businesses as we continued to support our customers. Towards the end of the quarter and into early April we saw a deterioration in our uncoated fine paper order book in Europe and South Africa as the effects of the various lockdown measures took hold. We are taking downtime at our Neusiedler mill (Austria) to manage our inventory levels, while we have temporarily stopped production at the Merebank mill (South Africa; 270,000 tonnes of annual production capacity), in line with government regulations. We will consider further such measures as required. In Flexible Packaging, while we are seeing strength in a number of consumer related applications, particularly in food, beverage and personal and home care, we are seeing somewhat weaker trading with our customers in building and construction industries and a mixed picture in industrial and other end-uses.

With the exception of the temporary closure of the Merebank paper mill and temporary closures or other production interruptions at a small number of our paper bags converting plants, all our facilities have been in operation throughout the period. Similarly, to date supply chain issues have been manageable, although we are seeing delays and increased costs in logistics.

The potential impacts of Covid-19 remain very unclear and the pace of change means any effect on operations and the Group’s financial performance for the year are difficult to predict.

Update on capital expenditure, maintenance shuts schedule and cost mitigation measures

We have moved quickly to protect profitability, liquidity and cash flow while seeking to ensure we are well placed to benefit when the recovery takes place.

Furthermore, we have adjusted our near term priorities to mitigate the health risks to our on-site employees.

We have postponed non-essential capital expenditure and slowed down some of our major capital projects, thereby both reducing near term cash outflows and minimising contractors and other non-operating people on our key sites. As a result, we now expect capital expenditure of around €600 million (previously €700-800 million) in 2020. This is likely to cause limited delays to the commissioning of certain of our capital investment projects. We have also postponed annual mill maintenance shuts to the second half of the year.

Discretionary spend has been stopped and we continue to actively manage our cost base to mitigate any impacts.

Strong financial position – Mondi has a strong balance sheet, sector leading investment grade credit ratings, good relationships with a broad group of banks, and has recently demonstrated its access to the public bond markets with the successful launch of a €750 million 8-year Eurobond. As at 31 December 2019, the net debt to underlying EBITDA ratio was 1.3 times, well below our single bank debt covenant of 3.5x net debt to underlying EBITDA (excluding the impact of IFRS16 adjustments).

Mondi currently has a strong liquidity position of around €1.5 billion, comprising €705 million undrawn committed debt facilities and cash of approximately €800 million, being principally the proceeds from the 8-year Eurobond issued on 1 April 2020 and other cash in hand.

Our core banks have recently agreed to extend the maturity date of the €750 million Syndicated Revolving Credit Facility from July 2021 to July 2022. The Group has a €500 million Eurobond maturing in September 2020; there are no other material maturities until 2024.

Dividend – Despite the Group’s strong balance sheet, the proactive measures it is taking to manage the current risks and the robust trading position to date, it is clear that the operating and trading environment is one of significantly heightened uncertainty. After due consideration, the Board has decided it is prudent to no longer propose a final dividend for the year ended 31 December 2019 at the forthcoming AGM.

The Board recognises the importance of dividends to shareholders. While it is its intention to pay a dividend, the Board will consider the appropriateness, quantum and timing of an additional interim dividend payment relating to the financial year ended 31 December 2019 when it has a clearer view of the effects of Covid-19 on the business and outlook.”

#Corporate client of Peel Hunt

To read the full research note, please click here