Figures published by Germany's disease control agency indicate the person-to-person infection rate has dropped to 0.7 in the country.
Any value below the crucial 1.0 level means the number of new people infected is less than the number of carriers. Like other countries successful in bringing the virus under control, Germany has been praised for its aggressive testing efforts. This data enables scarce resources to be allocated to stretched health services, allowing more targeted lockdowns and earlier releases. While the UK and others still lag behind in testing, this new data point shows we do not have to wait for a vaccine to achieve control.
Headlines
• UK job retention scheme extended to June.
• UK has extended its lockdown by three weeks.
• Chinese economy shrinks for first time in decades.
• Denmark has further eased restrictions.
• Germany has reduced its infection rates to 0.7.
• Unpaid invoices expected to double in 2021 Link.
• Potentially positive data for Remdesivir in Chicago Link.
• China increases deaths reported in Wuhan by 50% Link.
Company news
Buildings & Construction
• Foxtons Group– “As noted in the update provided on 20 March 2020, financial performance in the first 11 weeks of the year had been in line with the Board's expectations. Although strong and steady growth in the Company's sales commission pipeline during the first two months of the year had started to flow through to revenues in March, the necessary defensive measures taken by the Government to suppress the Covid-19 pandemic inevitably impacted trading in the final two weeks of the first quarter and our outlook for the remainder of the year. • Group revenue for the first quarter was down 3% to £23.0m (Q1 2019: £23.8m).
• Lettings revenue fell 5% to £13.9m (Q1 2019: £14.6m). The impact of the tenant fee ban in the period was £0.8m.
• Sales revenue was flat at £7.1m (Q1 2019: £7.1m).
• The value of the sales commission pipeline was up 20% on the prior year as at 19 March 2020.
• Mortgage broking revenue fell 5% to £1.9m (Q1 2019: £2.0m).
Whilst demand and supply side indicators of performance in both sales and lettings have been negatively affected since the lockdown was announced, it is too early to forecast the exact impact the lockdown will have on business performance. Commissions earned in the first three weeks of the 'lockdown' period were down 47% on the prior year.
Management actions in response to Covid-19 impact – The measures announced by the Government to restrict all non-essential movement, have had a material impact on the Group's revenues. In response, management rapidly undertook a number of actions in order to minimise the impact on cash flow. Overall, the actions taken during the three week period following the "lockdown" are expected to reduce the average monthly cash outflow of the business from c. £9m to c. £3m by the end of April. Actions taken to date include the following:
• all branches were closed on 23 March 2020 but the Company's technology systems and web applications have enabled it to continue to support customers online and over the telephone and to conduct virtual viewings and valuations;
• approximately 750 employees were furloughed on 25 March 2020 under the Government's Coronavirus Job Retention Scheme ("CJRS"). The vast majority of these employees will receive 80% of their base salary while furloughed. Approximately 350 employees are now working from home, serving customers and maintaining key operational aspects of the business;
• all employees earning a basic salary of over £40,000 whom have not been furloughed were asked to take a 20% pay cut for April and May, and approximately 80% accepted. In line with the wider workforce, all Executive Directors have volunteered to take a 20% reduction in base pay and all Non-Executive Directors a 20% reduction in fees for at least the two months of April and May. Given recent volatility in the Company's share price the Remuneration Committee intends to consider carefully the appropriateness of the share price used to calculate the quantum of the awards arising from the Restricted Share Plan in 2020, and to closely monitor the impact of Covid-19 on the Company's remuneration policy (such plan and policy to be proposed to shareholders at the forthcoming AGM) and use its discretion to adjust vesting outcomes if it considers that "windfall" gains have occurred;
• the Company has notified HMRC that it will be deferring the February PAYE and NIC payments (due in March) for at least one month;
• temporary flexibility and payment deferral is being negotiated with some of the Company's landlords and its vehicle leasing company, the majority of whom have accepted the need for flexibility;
• as far as possible, all other discretionary spend has been reduced to the minimum levels required to maintain reasonable levels of service and operational effectiveness. Where the Company is contractually committed to a certain level of expenditure, discussions with the majority of those suppliers have taken place to identify opportunities for deferral or discounts.
In addition to the above actions taken by management, the Government has confirmed that estate agents are eligible for full rates relief in the financial year 2020/21 and VAT payments due between March and June 2020 can be deferred to March 2021.
Scenario analysis for Covid-19, liquidity and proposed placing – As at 31 March 2020, Foxtons had a cash balance of £21.9m, including the fully drawn revolving credit facility (‘RCF’) of £5.0m. At that date, approximately £7.0m of this cash related to creditor payments that were subject to the above noted negotiations regarding payment terms and discounts.
Uncertainty around the scale, duration and impact of the Covid-19 pandemic on London property markets means it is impossible at this time, with a reasonable degree of precision, to determine the impact on our performance, particularly for the remainder of the financial year to 31 December 2020. Instead, we have analysed a broad range of potential scenarios, primarily based on assumptions of the period of lockdown restrictions in London and the time period that it might subsequently take for the residential sales and lettings markets in London to recover to more normal levels of activity. We have included in the scenarios estimates of the financial impact of the mitigating actions detailed above.
Although the Company's relatively strong net cash position is sufficient to support its current operations in a number of scenarios, it could potentially face a liquidity gap in the event of a reasonable worst case scenario emerging involving a protracted period of lockdown until the end of August, followed by a slow recovery in London property markets.
Rather than implement further cost reduction measures that could damage the Company's long term operational capacity or seek further borrowings, we have today announced a proposed placing to secure further equity capital, of up to 19.9% of our issued share capital (the "Placing"). The net proceeds from the Placing will be used to repay in full the RCF and to provide sufficient liquidity and flexibility to support the business through our reasonable worst case scenario and to help it exit the anticipated period of disruption in a strong financial position in the event of less pessimistic outcomes.
In addition, the Placing, if completed would:
• avoid necessitating decisions being made for short-term liquidity or cash management reasons that may cause detriment to Foxtons' long term prospects, and give the Company the flexibility to restructure its business in the case of a prolonged downturn;
• along with the management actions described above, enable Foxtons to retain a net cash position whilst weathering a reasonable worst case scenario period of lockdown restrictions in London until the end of August 2020 where the Company has modelled a reduction in revenues for Q2 and Q3 2020 of 78% lower than the same period last year, with a slow recovery in the sales and lettings markets in London by April 2021. For context, commissions earned by the Company during the first three weeks following lockdown were only 47% lower year on year.
• in the circumstances where the London sales and lettings markets recover sooner than the reasonable worst case scenario described above, Foxtons will be well placed to strengthen further its competitive advantage in the London residential sales market and potentially take advantage of opportunities to acquire lettings book portfolios. The Company would also consider returning any excess cash to shareholders.
All Foxtons directors, both Executive and Non-executive, intend to participate in the Placing.”
Financials
• Funding Circle – “Funding Circle has been accredited to join the British Business Bank’s Coronavirus Business Interruption Loans Scheme (CBILS) to distribute loans with an 80% Government guarantee to UK small businesses. Funding Circle is the largest online small business loan provider in the U.K. and has originated over £6.2 billion of loans to 57,000+ businesses.
CBILS loans will be funded by Funding Circle and a combination of new and existing institutional investors. We expect to open applications within the next week once we have completed the required legal and operational setups with the BBB. We anticipate all lending will go through CBILS when we launch until further notice. As a result, we will pause all non-CBILS lending from retail and institutional investors to concentrate on supporting the Government's SME stimulus programme. For investors that are unable (retail investors do not qualify for CBILS), or choose not to participate in CBILS, they will continue to receive repayments from existing borrowers with funds returned on a monthly basis.
US: As previously announced, Funding Circle has been approved by the U.S. Small Business Administration (SBA) and U.S. Treasury to originate Paycheck Protection Program (PPP) loans that are 100% guaranteed by the SBA. The program provides small businesses with forgivable loans up to $10 million to cover payroll costs, rent, mortgage interest, or utilities. Funding Circle has originated more than $3 billion to 16,000 businesses in the US. If Funding Circle were a bank, it would be one of the 50 largest small business loan portfolios in the US.
As stated at the FY results on 12th March, the year started well with the business seeing strong levels of demand from borrowers in both the UK and US through to mid-March. However, the second half of March and April to-date have been impacted by Covid-19. This was a result of the decision to proactively tighten credit whilst working to become accredited to both the CBILS and the PPP, and in order to allow us to better assess changing risk dynamics.
In direct response to Covid-19, we have implemented a number of actions to protect our people and our customers. We swiftly transitioned all of our teams to working from home with minimal disruption to our business. We have introduced a number of measures to protect investor returns, including actions on forbearance to help customers in difficulty. We will provide further details on the expected future performance of loans in due course.
Whilst we are pleased to have become accredited onto both the UK and US SME government stimulus programmes, it is not certain the level of demand we could expect to see from either programme, or how long they will last for. At this stage, given the increased uncertainty in the market, the Board believes it is prudent to withdraw financial guidance for 2020 until the outlook becomes clearer. We remain focused on our long-term priority of profitable growth and we will provide further updates on this progress later in the year.
The Group has a strong financial base and our balance sheet is robust. At 31 December 2019, the Group had net assets of £319.0 million, including cash of £164.5 million. As we continue to assess the impact of Covid-19 on the business, we remain focused on maintaining a substantial cash balance and anticipate only investing further cash in SME loans where necessary to support Government lending schemes.
The Group introduced new funding products in 2019 and carries the associated short and long term investments at fair value for loans and bonds that have not yet been sold. It is expected that the value of these investments will be impacted during the crisis period and potentially thereafter. However, at this stage it is not possible to adequately quantify either the short or longer term impact until more data is available and there is more clarity on the impact respective government initiatives will have on the post Covid-19 economy.”
• Man Group – “In the three months to 31 March 2020, as the economic repercussions of Covid-19 impacted financial markets, with MSCI World Index decreasing by 21%. Our FUM decreased by 11% in the first quarter to $104.2 billion. This was driven by negative investment movement of $10.7 billion as our long-only strategies declined with equity markets and $2.7 billion of FX translation as the US dollar strengthened against a range of currencies since the year end. This was marginally offset by our absolute return strategies which had positive investment movement.
We continue to have a robust balance sheet and liquidity position.
As at 31 March 2020 we had $570 million of net financial assets1 including $253 million of cash. The reduction in our net financial assets1 since year end primarily reflects normal seasonal working capital movements. This balance sheet and liquidity position reflects actions we took in 2019. We repaid our financial indebtedness by calling our Tier 2 notes and entered into a new $500 million revolving credit facility which matures in 2024.
Given the overall strength of our balance sheet and liquidity position, we are proceeding with our 2019 final dividend and share repurchase programme (announced in October 2019) as planned.”
• Panther Securities – “In these circumstances we are approaching requests from tenants for rental relief on a case by case basis. In general, we have been supportive to our tenants, particularly the smaller and independent traders that are less resilient to the enforced closures. With those who have bigger shoulders than us we have applied more pressure to continue to have them honour their obligations. However, in all instances we believe that our approach is sensible and for the best long-term interest of our shareholders. As well as monitoring income, we have, where possible, reduced our overheads and kept good communication with our stakeholders, including our lenders.
Our income during the pandemic lockdown – We have a large spread of tenancies and a robust income stream, which the Directors believe is much stronger than other comparable property investment businesses of our market size, as we favour property investments of a secondary nature, which are higher yielding and generally multi-let.
We estimate that approximately 41% of our rental income comes from businesses that have not been forced to close or been recommended to close under government guidelines. The annual income from these businesses is approximately £5.6m and would be enough to cover our interest obligations to our lenders of approximately £4.1m and most of our overheads. We also took advantage of the market in 2018 by selling £41m of property, realising a profit of £11m. We substantially de-geared the Group’s balance sheet at that time which left us with bank facilities that we were able to re-draw and also cash funds. We currently have over £12.5mvof free cash in our current account to utilise on top of any potential income.
Given our cash funds, potential income and the significant quantum of uncharged properties, the Directors believe that the Group has sufficient liquid resources to continue trading for at least a further 21 months and probably even longer. This is on a “worst case” basis, where the lockdown is maintained at the current level of restrictions over the whole of that period.
Future earnings – The Directors believe that it is too early to tell what impact the pandemic virus will have on our results for the year ending 31 December 2020, but of course it will not have a positive effect.
Dividend – We are very proud of our dividend track record and our Chairman believes that we have a 37-year track record of never reducing or missing a dividend. As such it is the Directors’ current intention to pay a further 6p per share dividend to our loyal shareholders for the year ended 31 December 2019. We have significant cash reserves and distributable reserves to justify this dividend.”
• Record – “The business generated strong trading momentum coming into the final month of its financial year with AUME for the 11 months to 29th February 2020 ahead by 13%. Client numbers increased to 72 during the year, with no material client losses, reflecting both our ability to generate long-term enduring client relationships and the fruits of our ongoing new business generation initiatives.
As expected, asset pools whose currency risk exposure is managed by Record have seen their values impacted by falls in global financial markets in response to the Covid-19 crisis, with market movements contributing to a reduction in AUME of $4.5bn as at 31st March 2020. However, with the exception of the reduction of approximately $1bn to a temporary tactical bespoke mandate announced on 13th March 2020, Record saw net inflows of $1.1bn in the final quarter, with strong performance from our hedging products maintained through March, reflecting the value ascribed by asset owners to specialist advisors with proven expertise in managing complex financial risk. Client engagement over the course of recent weeks has been particularly strong.
Covid-19 – Record's track record of success is founded on the quality of its employees and the Board's first priority has been to ensure their safety and actively promote their well-being. The Company has successfully transitioned to full remote working, with no interruption in service to clients, and has not cut staff wages, nor taken advantage of the Government's job retention scheme. Record continues to offer its complete suite of services to clients in a seamless manner, testament to the operational flexibility of our business.”
• Urban Exposure – “The Company continues to operate with its business continuity plan in place. Our workforce is now working remotely from home with the same functionality they would have in the office. Inevitably the business will be impacted by Covid-19 and the issues that it is causing across the real estate market, and beyond in the wider economy. Along with many other businesses, the Company has taken action to reduce costs and manage its cash flow to ensure the Company is well prepared for any possible further disruption from the impact of Covid-19. Specifically, the Company has: • Reduced headcount, through a combination of both the Government furlough scheme and reducing hours of some staff, in respect of 13 roles and cancelling new hires in respect of 3 roles (out of a total staff base of 30).
• Determined that no bonuses will be paid for the 2019 year, which achieves a cost saving of £2.1m.
• Reduced pay by 10% for the CEO, COO, CRO and CFO on a temporary basis from 1 May 2020 for a minimum of three months.
In response to the Covid-19 pandemic, the Company has conducted a thorough review of its existing and future loan pipeline, and will focus efforts in the immediate future on its existing loan portfolio.
We are communicating with borrowers on a weekly basis, and actively managing issues that may arise, providing support and advice as appropriate regarding any impact of the pandemic on individual construction sites.
The Company has conducted a comprehensive review of all loan facilities, insurances and contracts, and has conducted a detailed stress test of the loan portfolio. Due to the Company's conservative LTGDV position the Company believes that the loan portfolio remains robust in the face of the unprecedented market conditions. Furthermore, our funding facilities and joint ventures remain in place, and we are working closely with our funding partners to continue to assess and mitigate any risks that may arise in the future.
FY 2019 Results – The Company will publish its audited financial results for the year to 31 December 2019 on 28 May 2020. On an unaudited basis the Company achieved a small profit before tax for the period of £0.2m on the basis of:
• Revenue for the period of £9.0m, which is stated after a £2.3m write down of a legacy receivable.
• Total costs for the period of £8.8m.
The unaudited Tangible Net Asset Value (TNAV) of the Company for the Period was £133.0m, representing 83.9 pence per share.
Dividend – Given the nature of the current Covid-19 pandemic and the market uncertainty it has created, the Board will not proceed with payment of the final instalment of the proposed 2019 dividend being 3.33 pence per share and £5.3m in aggregate. The Board will review the Company's dividend policy for 2020 later in the year.”
Food, Drinks & Household
• Associated British Foods – “Associated British Foods plc has received confirmation that it is eligible to access funding under the Covid Corporate Financing Facility.”
Healthcare
• Mediclinic International – “Mediclinic is working closely with governments and local regulators to combat the Covid-19 pandemic, supporting the different initiatives being implemented across geographies. Clearly defined infection prevention and communicable disease emergency preparedness programmes that govern admission, containment, triage and treatment of suspected or confirmed Covid-19 cases, are already well-established across the Group.
With the assistance of strong infection prevention and control teams, dedicated multi-disciplinary taskforces are constantly re-evaluating Mediclinic's responses to this dynamic and rapidly evolving situation. The Group taskforce, centrally co-ordinated by the Group Chief Clinical Officer with its global view of trends and policy, helps ensure medical protocols and best practices are shared across the Group and supports the divisions' establishment of contingency plans with particular consideration for any impact on supply chain, ICT, finance, risk and human resource capacity.
The Group benefits from having procurement teams on three continents, all taking co-ordinated and pro-active measures to secure the supply of critical personal protective equipment ("PPE"), drugs, consumables and Intensive Care Unit ("ICU") equipment. The Group's global sourcing capability strengthens its ability to respond to the current situation and evolving needs.
Across the Group, and in line with the global trend, most non-essential elective procedures and outpatient activities have been postponed. This is intended to safeguard, as far as possible, sufficient hospital capacity, frontline clinical staff and PPE as the pandemic peaks and related admissions increase. These cases are reimbursed through the established health insurance schemes in all divisions.
In addition to Covid-19 admissions, the Group continues to make available its wide range of acute care services for urgent healthcare requirements including emergency and trauma care, urgent medical care, cardiac and vascular surgery, obstetrics and gynaecology, paediatric and neonatology procedures and neurology, oncology and urology treatments.
The Group has invested in a number of key initiatives to help its staff and patients deal more effectively with the crisis, including: acquiring additional ventilators and related consumable products; expanding ICU capacity where possible; establishing testing units; sourcing additional PPE for the treatment of Covid-19 cases; establishing additional laboratory facilities to support Covid-19 testing; launching telemedicine and prescription home delivery services for chronic medication; creating drive-through pharmacies; identifying separation areas in hospitals and ensuring these are sufficiently prepared for infection and prevention control and treatment; establishing alternative interim facilities to admit asymptomatic and low acuity cases; establishing 24/7 patient call centres and crisis control centres; updating websites and developing online risk assessment tools; software development to support various tracking and testing initiatives; and, developing communication tools and guidelines for staff and patients.
Strong financial position and liquidity – As with most industries and companies, the full impact of the Covid-19 pandemic on Mediclinic is currently uncertain. The Group has put in place the necessary structures and processes to monitor and mitigate existing and emerging risks to the business with the main focus areas being people, supply chain and liquidity.
The pandemic and its consequent national lockdowns and associated actions suspending non-urgent elective surgery is likely to have a significant impact on the Group financial performance for the year ending 31 March 2021. This will be offset by Mediclinic's response to the crisis in addition to the ongoing range of primary and acute care services offered across the Group.
At 31 March 2020, the Group had material headroom to covenants in its existing debt facilities and a strong liquidity position heading into the global pandemic. The cash and available facilities of the Group at the year-end were around £515m. To further support the Group's liquidity position, all non-urgent and non-committed capital programmes have been postponed.
As part of the Group's proactive measures, covenant test waivers have been agreed in respect of its material borrowings across all three divisions up to and including March 2021. This allows the Group to focus on the vital role it plays during the pandemic and to prepare for the anticipated increase in demand from postponed treatments once the peak of the pandemic subsides. The Group has no material near-term debt maturities with the next being at Hirslanden where a CHF145m Swiss bond is due in February 2021.
As part of the Group's broad response to maintaining its liquidity position through the crisis and to maximise its support tackling Covid-19, the Board has taken the prudent and appropriate decision to suspend the dividend. The Board recognises the importance of its dividend to shareholders and will keep this position under review. In line with this unprecedented decision, the Executive Directors' annual salary increases and short-term incentives have also been suspended.”
#corporate client of Peel Hunt
To read the full research note, please click here
