Coronavirus - 14 September 2020

Headlines

Buildings & Construction

• Gleeson – “The impact of the shutdown and loss of fourth quarter completions meant that operating profit for Gleeson Homes fell by 70.1% to £9.0m (2019: £30.1m).


Average selling prices at £130,900 were up 1.6% driven by 3.3% higher underlying prices offset by changes in bed and site mix. Gross margin on units decreased to 27.8% (2019: 30.1%) due to the impact of Covid-19. Strategic Land had anticipated completing most of its transactions during the final quarter of the year. House building customers paused the purchase of sites during the final quarter and, as a result, the division was broadly break-even with an operating profit of £0.2m (2019: £13.0m).

Group profit before tax for the year fell by 86.4% to £5.6m (2019: £41.2m).

The business took swift action to protect cash at the start of the Covid-19 pandemic, including cancellation of the interim dividend, pausing build activity and land acquisition, cutting discretionary expenditure, furloughing 76% of staff, a freeze on recruitment and senior managers and directors volunteering to accept significant temporary pay cuts. The Group also drew down £60m of loans from its £70m committed bank facility and raised a further £16.4m of gross funds from a successful share placing in April 2020.

We are currently seeing strong demand and expect this to continue through the year as the demographics of our customer base and the nature and price point of our product helps to insulate us from the impacts of rising unemployment, the end of the stamp duty holiday and the forthcoming changes to the Help to Buy scheme.

We have therefore reaffirmed our interim target of delivering 2,000 homes per annum in 2022.”

Household

• MP Evans# – “During July 2020, CPO prices strengthened from just below US$600 per tonne to reach a high point of US$740 per tonne. Since then the price has fluctuated, mainly trading within a band of US$700 to US$720 per tonne. At the end of the first week of September, the price stood at US$720 per tonne against the anticipated background of tight supply of all major vegetable oils and recovery in demand, notably in India and China, following the shock of the Covid-19 pandemic. Overall, production increase in palm oil is expected to slow compared with 2019. The likely positive impact of this on prices may be at least partly counterbalanced by a lower demand for palm biodiesel in the face of low mineral-oil prices. The forward markets for CPO anticipate further price increases before the end of the year and a price holding firm into 2021.



The strong pace of the Group’s crop growth during the first half of the year abated somewhat during the third quarter. This was as its estates in Bangka and Kota Bangun felt the effects of a dry period in, respectively, the middle quarters of 2019, and the end of 2019 and the early months of 2020. The conditions in these areas have also had some impact on the availability of crop to buy from third parties, so the group will not in the second half of 2020 match the volume of third-party crop purchased in the equivalent period in 2019. Crop volumes are, however, expected to improve during the fourth quarter. The group has put measures in place in respect of Covid-19, and does not expect the pandemic to affect its ability to harvest or produce CPO. The increasing maturity of the group’s palms in all areas provide the basis for significant growth in crop into the middle of decade, and hence rising revenue, even without the acquisition of any further hectarage. The group anticipates increasing production of certified sustainable palm oil as it completes the development of its new projects.

The board remains confident that the fundamentals of the palm-oil market continue to be encouraging. Vegetable oil is a basic foodstuff and increasing demand from a growing world population looks likely to persist. In the longer term, insufficient levels of replanting in Malaysia and a reduction in new Indonesian planting are likely to curb growth in production. Palm oil delivers by far the highest yield per hectare of all the vegetable oils and has the lowest cost of production. Hence, the board remains of the view that palm oil is well placed to benefit from rising global demand for vegetable oil and, therefore, that the outlook for the group remains positive.”

Healthcare

• Abcam – “The improving trends in customer activity levels seen during the final quarter of our last fiscal year have continued into our new fiscal year as more laboratories continue to partially or fully reopen.



Given the ongoing Covid-19 pandemic and obvious risk around further outbreaks and potential for the re-introduction of more stringent lockdown measures, the company is not providing full year guidance at this time. Despite the heightened uncertainty that Covid-19 continues to bring to our near-term outlook, the fundamentals of our business remain strong and the medium- and long-term growth prospects attractive. Accordingly, our investment plans remain unchanged as we continue to focus on achieving our 2023/24 financial goals, comprising revenue of £450-500m; an adjusted operating margin of over 30% and a Return on Capital Employed of over 18%.”

Support Services

• Costain – “At the end of March, c.30% of the Group’s operations were paused, with the productivity on other projects also affected. During the second quarter, all the paused projects were reactivated and in June all were operational, albeit at reduced levels due to the necessary safe working restrictions implemented.



While revenue in Q1 was at a very similar level to last year, revenue in Q2 was down by 16% compared with Q1 and down by 17% compared with the same period in 2019, reflecting the impact of Covid-19. As a consequence, revenue, including the Group’s share of joint ventures and associates, reduced by 8% to £548.7m in the first half of the year (H1 2019: £599.2m) on an adjusted basis. The reported revenue, after the P&H and A465 contract adjustments, was £459.9m for the period (H1 2019: £594.1m).

The group’s operating profit was significantly impacted by Covid-19 working restrictions. A number of cost reduction measures were taken to mitigate the associated drop in revenue, including the cancellation of all discretionary expenditure and a reduction in salaries and directors’ fees for the board and senior leadership team of 30% for three months to 30 June 2020. The group does, however, have a level of fixed costs and has continued to incur expenditure in relation to new contract opportunities.

Our critical services continued throughout the UK lockdown with strict safety measures in place, although initially around one-third of contracts, principally in London, were paused. Gradually, we were able to get back on site across the business with all projects now resumed. We are now operating at on average c.90% productivity across the group compared to pre-Covid-19 levels. We remain alert to the continuing challenges that the necessary safety measures place on all our operations.

Looking ahead, assuming no further sustained Covid-19 lockdowns, we are confident of delivering growth in profits and margins next year. Although we are mindful of the macro-economic uncertainties ahead, Costain is in a strong position with secured long-term programmes and a positive market backdrop, in particular the UK Government’s drive to progress investment in infrastructure so that it is better, greener and faster in support of the nation’s economic recovery.”

• SThree – “Group net fees in Q3 declined 14% in the year as performance continues to be impacted by declines in aggregate demand as a result of the Covid-19 pandemic across all of our territories and sectors. Our Contract business has shown resilience with net fees down 12% in the quarter, representing 77% of group net fees. The contractor order book has grown 1% since the half year as the group sees increased sales activity levels along with increased contractor retention levels.



DACH net fees were down 9% in the quarter, a good performance in the circumstances despite strong prior year comparatives. Our Life Sciences business has shown resilience with net fees down only 1% with increased demand in Quality Assurance and Clinical Research & Development. All other sectors declined in the quarter. Germany, our largest country in the region, saw net fees decline 10% but has seen its contractor order book grow 6% since the half year.

The group tracks a number of indicators as to the underlying strength of the market and demand for our services and is pleased to have recorded an increase in sales activity levels, in particular in Contract. Group Contract sales activity in Q3 has improved both sequentially (up 26% vs Q2) and showing an improving trend YoY (Q3: -20% vs Q2 - 38%), and the Group has also seen an improvement in contractor retention rates.

These factors, together with the strength of the balance sheet, have enabled the group to implement a number of initiatives as the global economic picture improves. This includes the return of staff from furlough, with all previously claimed furlough support from UK government of £600k to be repaid, and the repayment of the RCF of £50m which was drawn down at the beginning of the lockdown period but not utilised. The group also resumed a modest share buy-back programme to satisfy employee ownership plans.

In its most recent client sentiment survey there were clear signals of an increase in recruitment activity levels. For example, 78% of responses state that they are actively hiring in some way, a significant shift from an earlier consultant survey, and with 42% saying that hiring levels are back to pre-Covid levels which we see as another encouraging sign. Despite all the economic challenges resulting from the pandemic, approximately 50% of responses to our client survey still stated that “finding the right talent” is a significant challenge, one that we are well positioned to address.”

• Xpediator – “Covid-19 has had an impact on the business, but the group has traded resiliently through this extraordinary period. Whilst activity levels have been slightly lower, with revenues down by 2.7% during the period, demand from some sectors particularly in the freight forwarding division was strong throughout. Those areas which are dependent on either traffic volumes (Affinity) or are exposed to markets with Government restrictions, such as Easy Managed Transport (UK High Street Fashion) or Benfleet (with China and Italy being key markets) experienced reduced trading levels.



Xpediator has stabilised during H1 2020 despite Covid-19 with reductions in revenue more than offset by agile selling and purchasing, cost savings and the Group is well placed to continue to expand. Our mix of geographies and freight management services represents a unique combination and provides our customers with solutions to access these markets and store their goods. Despite the ongoing uncertainties around Brexit and Covid-19 we are confident in the future demand for our services and are focused on ensuring we have the right growth disciplines, infrastructure and personnel in place to support the profitable expansion of the group going forward.

We expect the full year adjusted profit to be in line with or above the level achieved last year.”

Technology

• Focusrite – “The Group continues to see increased demand for solutions that enable the creation and playback of audio content for music, podcasting and streaming. Much of the Focusrite Audio Engineering and ADAM Audio portfolios cater to these workflows and consequently have experienced



continued high demand over and above our growth levels prior to the initial lockdowns. The demand for Martin Audio products, especially for live sound events such as tours, festivals and theatres, has been negatively impacted since March 2020 due to Covid-19 restrictions. However, we are now seeing some early signs of recovery for installed sound solutions in many regions for clubs, houses of worship and corporate audio / visual solutions.”

Lifting restrictions

• Under Singapore’s “Phase 2”, non-essential retail stores, gyms and most businesses are allowed to reopen. Dine-in services in restaurants and cafes will also resume. However, gatherings of more than five people are not permitted.

• In Wales, all non-essential shops can reopen, providing they follow social distancing rules from Monday. The housing market will begin to reopen, with viewings able to take place. Outdoor markets can also reopen, along with outdoor sports courts for non-contact sports, as well as places of worship for private prayer. Childcare facilities will begin to reopen on a phased basis



Other

• Employers in Britain are planning more than twice as many redundancies than they did at the height of the last recession, new figures show. Completed redundancies could reach 735,000 this autumn, researchers at the Institute for Employment Studies say.

• Israel is to impose a new national lockdown, with restrictions coming into effect on the Jewish New Year. The country’s second lockdown begins on Friday and lasts at least three weeks.

• New Zealand Prime Minister Jacinda Ardern will lift coronavirus measures across the country from 21 September – although restrictions will remain in place in Auckland.

• Sweden has lifted its advice against non-essential travel to the UK. The change was announced on Monday and comes into immediate effect.

• Amazon has announced 100,000 new jobs in the US and Canada.

• Saudi Arabia will partially lift its suspension of international flights as of 15 September to allow “exceptional categories” of citizens and residents to travel.

• South Africa’s finance minister, Tito Mboweni, warned on Sunday the economy could shrink by more than the 7% forecast for 2020.


#corporate client of Peel Hunt