Maitland/AMO Morning Monitor – Monday 6 April 2020
What really matters... COVID-19
UK and US approach peaks
The week ahead is likely to be a grim one for COVID-19 numbers with confirmed cases and deaths escalating in the UK and the US over the weekend as the outbreaks in both countries are expected to see their peaks in the coming weeks. A surge of cases in the UK saw new cases rise by 5,903 to 47,806 on Sunday, with the number of deaths now just short of 5,000. Over the weekend Donald Trump warned of a horrendous couple of weeks ahead, with “a lot of death” to come as US fatalities approached the 10,000 mark and confirmed cases rose above 330,000 – more than a quarter of the global total so far. Global cases have now passed 1.26 million, with more than 69,000 deaths reported.
Chinks of light?
But the markets have taken heart in overnight trading from the emergence of some positive signals from a number of COVID-19 hotspots over the weekend. Spain has now recorded three successive days of falling numbers in new cases and deaths reported, while both Italy and France saw the lowest number of deaths for some days on Sunday. Hospital admissions and deaths also fell in New York for the first time. While sterling fell overnight on the news of Boris Johnson’s admittance to hospital, U.S. and European equity futures jumped and stock markets in Asia have followed suit.
The scale of the economic cost of the crisis continues to unfold, with fears mounting of a disinflationary shock which could lengthen what already threatens to be the deepest recession since the Great Depression. The CEBR estimates that the UK lockdown is costing the economy £2.4billion a day. Eurozone finance ministers will meet virtually on Tuesday to discuss how to restart the battered economy and how to fund the measures necessary to do so.
Against this backdrop the more positive COVID-19 numbers have given rise to muted optimism and sharper focus on exit strategies for battered economies. While the focus remains firmly on suppression of the virus, we are starting to hear some public statements from ministers in Europe about the possible easing of lockdown restrictions in the weeks ahead. In Spain, where the lockdown has been extended until April 26th, Pedro Sanchez, the Prime Minister, indicated that some non-essential work including manufacturing and construction may resume after Easter. In Italy, the head of the body responsible for co-ordinating the response to the virus suggested that positive numbers may allow a move to a Phase 2 by next month, with a partial lifting of the lockdown and the restarting of some business activities. This follows the lead of Denmark, which last week announced plans for a gradual opening up of society after Easter, if numbers remain stable. The experience in China will be watched closely, as around 6 million people return to work this week across Hubei Province where the virus first emerged.
Spotlight remains on banks
The banks look set to face further scrutiny this week as the shockwaves of the coronavirus impact continue to pulse through corporate UK and the banking sector’s role as the transmission mechanism for government aid is put to the test. By the end of last week it was reported that of 130,000 enquiries for small business loans only 1,250 had been made, totalling £145 million.
Relaxation of capital rules by banking regulators around the world are estimated to have freed up around $500 billion of capital so far. In America the US banks are resisting pressure to follow Europe’s suit by withholding dividend payments, arguing that most of their capital returns are in the form of buybacks which have already been suspended voluntarily until at least April. Meanwhile retail investors in Hong Kong have threatened legal action after HSBC cancelled its dividend under pressure from UK regulators last week.
Central bankers also remain in the news, with Andrew Bailey, the Bank of England’s newly appointed Governor, keen to stress independence from government and his unwillingness to use monetary financing – printing money – to increase the deficit and support the economy. In the US, the Federal Reserve has acted to ease pressure in capital markets with a series of measures which analysts estimate could result in the Fed’s balance sheet expanding to more than $12 trillion this year, equivalent to about 60% of US economic output.
Efforts to forge a global deal to cut oil output lost momentum over the weekend after a diplomatic row between Saudi Arabia and Russia over responsibility for the price war flared up. A meeting of OPEC+ members which was scheduled for today has been pushed to later in the week, likely Thursday. President Trump has kept the pressure up with threats to use tariffs if needed to protect the US oil industry. Having gained 50% last week on hopes for a deal, oil prices initially fell 12% on opening last night, but have since recovered to post more modest declines. Oil demand has fallen by roughly a third as a result of the pandemic, the largest fall in history.
Sir Keir Starmer was elected leader of the UK’s Labour Party on Saturday, with a strong majority reflecting his success in appealing to both the Corbynites and the centre-left of the party. Key early appointments to the shadow cabinet included those of defeated leadership candidate Lisa Nandy as Foreign Secretary, Anneliese Dodds as the shadow chancellor and Nick Thomas-Symonds with the home affairs brief. The other figures we are likely to see most of are Rachel Reeves shadowing Michael Gove at Cabinet office, Jonathan Ashworth staying on at Health and Deputy Leader Angela Rayner being given the party chair role. More announcements are expected on Monday. In his first broadcast interview as Labour leader, Keir Starmer told Andrew Marr that he would “engage constructively” with the government over the coronavirus crisis and had spoken to the Prime Minister on Saturday afternoon. But he said this would mean asking the government “difficult questions” on issues such as testing and the availability of PPE for health and social care workers. He also called for the government to publish its “exit strategy” to end the lockdown and to prepare a plan for vaccination.
Salute The NHS
In the fight against coronavirus, a group of leading businesses – including, Tesco, Yodel, Domestic & General and Maitland/AMO – have joined forces with Ron Dennis CBE to provide 1 million free meals to the NHS frontline over 3 months. Working pro bono they have launched an initiative called SalutetheNHS.org.
Stock market moves
- Asia stocks rallied on optimism that measures to contain the coronavirus pandemic were starting to bear fruit. Japan’s benchmark Topix added 2.8% on Monday, South Korea’s Kospi climbed 2.7% and Australia’s S&P/ASX 200 gained 4.1%. Hong Kong’s Hang Seng was up 1.1%, while markets in mainland China were shut for a public holiday.
- S&P 500 futures tipped the Wall Street benchmark to rise 3.3% when the US opens for trading.
- With tensions between Russia and Saudi still high, Brent crude, the international oil benchmark, fell 1.9% to $33.47 per barrel while US marker West Texas Intermediate dropped 3.6% to $27.33 a barrel.
- In the currencies market, the pound slipped 0.3% to $1.2229 after UK Prime Minister Boris Johnson was admitted to hospital on Sunday for precautionary tests, still suffering from coronavirus symptoms after developing signs of infection 10 days ago.
- European markets have opened up this morning, with the Eurostoxx 600 and FTSE 100 both up 3.10% in early trading.
In other news
- The Queen invoked the spirit and collective effort of World War II to fight the coronavirus in a broadcast speech to the nation on Sunday, offering the reassurance that “if we remain united and resolute, then we will overcome it.”
- Widely circulated reports linking 5G with the spread of the coronavirus were rubbished by the UK government over the weekend after a number of mobile phone masts were set on fire last week, leading to further demands for the social media giants to clamp down on fake news around coronavirus
- As a growing number of companies see their leadership teams volunteering temporary salary cuts, Health Secretary Matt Hancock has called on footballers to support struggling hospices with their own salary sacrifices
- Videoconferencing firm Zoom has reportedly gone from 10m users to more than 200m since the onset of the pandemic – not without some well-publicised issues around security and the emergence of “Zoom-bombing” in the form of unauthorised crashing of open calls, often accompanied by the posting of obscene messages
- 9.15am - Dominic Raab chairs Government's C-19 Committee, standing in for Boris Johnson
- 11am - Lobby briefing at No10 (off-camera), update on PM expected
- 5pm - Government's daily press conference
- During the day - Keir Starmer appoints the rest of his Shadow Cabinet
Corporate announcements* Maitland Client
Sage Group PLC Trading and COVID-19 update
- Group operations have continued with minimal disruption to date.
- Growth in organic recurring revenue, which represents around 90% of Group sales, was ahead of full year guidance, supported by strong momentum in core markets. Other revenue (SSRS and processing), representing around 10% of Group sales, declined in line with the Group’s strategy, although the decrease accelerated towards the end of March as a result of COVID-19 impacting licence sales and professional services implementations.
- Sage anticipates being affected in the following areas: customers deferring purchase decisions, leading to a slowdown in new customer acquisition, licence sales and professional services implementations; and a higher business failure rate leading to an increase in churn.
- The Board now believes it is likely that organic recurring revenue growth will be below the previously guided range of 8% to 9%, and that the decline in other revenue (SSRS and processing) will accelerate significantly in the second half, with some associated impact on margin.
- Revenue increased 8% to £1,240m (HY 2019: £1,143m).
- Operating profit increased 6% to £186m (HY 2019: £175m).
- Basuc EPS increased 17% to 46.9p (HY 2019: 40.2p).
- Andy Reynolds Smith, CEO, said: “Over the coming months, COVID-19 presents significant uncertainty and our number one priority is to keep our people safe and well. We enter this period confident in our resilience and preparedness; financially, operationally and strategically. We have clear plans underway to contain costs, flex our operations, maximise business continuity and conserve cash. This combined with the significant built-in resilience and our diverse critical end markets with long term structural drivers, will deliver the very best performance through this period and position us well for the future. I’m deeply grateful to our incredible people who are handling this terrible situation with real grit and determination in these challenging times.”
- To-date, the primary impact from COVID-19 has been on engine flying hours in the Group’s Civil Aerospace business. Widebody flying hours fell by approximately 25% in the first quarter, compared to the prior year, and fell approximately 50% in March, with an expected further deterioration in April.
- Defence activity remains in line with expectations, with no material operational or financial disruption as a result of COVID-19 in the first quarter.
- In the UK, the Group is part of the VentilatorChallengeUK Consortium which is working to increase the UK’s supply of ventilators. Its role in the consortium is to organise a parallel supply chain to feed in materials as quickly as possible to a number of new assembly plants.
- Notwithstanding the Group’s financial and liquidity position, the Board has decided that in light of the uncertain macro outlook it is no longer recommending a final shareholder payment of 7.1 pence per share in respect of 2019, equivalent to a further £137 million.
- The Company announces that it has been informed by lawyers acting for Abu Dhabi Commercial Bank PJSC (“ADCB”) that ADCB has filed an application for the appointment of administrators in respect of the Company under the Insolvency Act 1986, and that a hearing has been scheduled for 9 April 2020.
- The Board is in discussions with ADCB and other creditors to address creditors’ concerns; to have the application withdrawn; and to avoid the appointment of administrators, which it does not believe would be in the interests of stakeholders as a whole. The resolution is likely to involve material changes to corporate governance of the Group and the composition of the Board itself.
- Trading in the first quarter has not been significantly impacted by disruption from the pandemic. Nonetheless, the Group has already been taking mitigating actions in anticipation of tougher conditions to come.
- Bodycote is approximately £83m drawn on its £230m revolving credit facility (RCF), which has two more years to run.
- Bodycote has a strong balance sheet and can withstand a significant decline in trading conditions. Nonetheless, given the uncertainty in the current environment the Board is keeping the proposal for the final dividend under review.
- The Group is suspending our previous revenue and margin guidance. ·
- The Group is reducing overhead and project support costs by at least US$100m in 2020 and by up to US$200m in 2021.
- The Group is conserving cash and liquidity by reducing capex by 40% and suspending the 2019 final dividend.
- Group net gaming revenue +1% and Online NGR up +19% in the first quarter.
- However, the closure of retail outlets and the cancellation of sports events significantly reduced revenue from mid-March.
- The Group estimates the impact of COVID-19 before any mitigating actions equates to a reduction in EBITDA of approximately £100m per month.
- Following the initiation of a number of mitigating actions the Group now expects to reduce this EBITDA impact to approximately £50m per month.
- The Board has taken the prudent decision to withdraw the second interim dividend that is due for payment on 23 April 2020.
- The Company remains relatively well placed to weather the crisis given its robust balance sheet, low leverage and defensive and diversified portfolio of long let, index-linked real estate assets let or pre-let to a wide range of strong tenant covenants.
- The Company’s remaining forward funding commitments are fully covered by the Group’s undrawn revolving credit facility.
- The Company is not exposed to any material development risk through its forward funding projects.
- The Group is actively assisting those that are being materially impacted by providing proportionate assistance.
- The Board confirms that it expects to approve the payment of the Company’s final quarterly dividend in respect of the year ended 31 March 2020, at the rate of 1.4375 pence per share. The final dividend is scheduled to be announced in May 2020, along with the Company’s annual results, and paid in June 2020. This will meet the Company’s dividend per share target of 5.75 pence for the year.
- All members of the Board, along with some members of our most senior editorial and management team, will take a pay reduction of 20% effective immediately. All company bonus schemes for 2020 have been suspended and the Board retains its discretion over the Long Term Incentive Plan.
- The Board has decided it will no longer propose a final dividend for the financial year ending 2019.
- All of the Group’s key national and regional publications will continue to operate at this vital time despite these measures and we have sought to spread the burden of these actions across all stakeholder groups.
- All of the Group’s major sites remain open, with key workers continuing to deliver critical support to customers and the Covid-19 relief effort, including through its Defence and Emergency Services businesses.
- Excluding the impact of COVID-19, trading for the final quarter of the financial year ended 31 March 2020 was in line with expectations.
- COVID-19 had a small impact on trading in the final quarter. While the vast majority of services continue, some areas of the business are running at reduced levels, including short cycle work and some training and transportation activities. Where services continue, priority is being given to critical programmes.
- The Board will consider the final ordinary dividend for this financial year ahead of our full year results announcement taking into account developments over the next two months.
- WH Smith notes recent press comment regarding the possibility of the Group undertaking an equity issue.
- The duration of the Covid-19 related crisis is uncertain and, as a result, the Group has secured new lending facilities of £120m.
- The new financing arrangements are conditional on raising new equity. As a result, the Group is in an advanced stage of preparation for an equity issue of a maximum of 13.7% of its issued share capital by way of a placing.
- Manufacturing facilities remain operational, with measures in place to protect our people.
- First quarter trading impacted by COVID-19, like-for-like sales expected to be down 10%.
- Many mitigating actions already implemented. Working to preserve as many jobs as we can. Further cost action being developed.
- Strong balance sheet and liquidity position.
- Special dividend withdrawn; final dividend postponed.
- Financial guidance withdrawn given current circumstances; will be revisited when appropriate.
- The Group is well capitalised with good liquidity and a strong balance sheet.
- The rental housing market has remained resilient.
- High occupancy levels of over 97%.
- High rent collection rate of 95% in March, which is in line with historic trends.
- Sales remained robust to the end of March.
- Our investment in technology is enabling us to continue to serve our customers remotely, including on-going leasing activity in our new buildings. Our strong in-house operational team is experienced in supporting customers during challenging times.