By Powerscourt on 22/04/2020

Powerscourt Coronavirus Briefing – 22 April 2020

ANALYSIS

The oil price collapse from earlier this week has rippled out to impact ordinary investors, with most of the world’s main indices sustaining heavy losses on Tuesday. The recent disconnect between the impact of the coronavirus on the “real” economy and on the stock market appears to have closed.

The S&P, Dow Jones, FTSE and Nikkei indices all sustained major falls on Tuesday, with the S&P 500 closing down over 3% amid questions about whether some large energy producers could survive the oil crash which last night saw the price of Brent Crude oil fall to its lowest point in 20 years. Asian markets fell further on Wednesday morning. The US energy secretary, Dan Brouillette, met leaders of the House of Representatives on Tuesday to discuss the potential for an oil sector bailout.

Netflix revealed it has signed up twice as many new subscribers as it had forecast in its first quarter with millions of people in lockdown. But the streaming service said that its production pipeline could be threatened by an extended period of restrictions. The strong results compound the ascendancy of tech companies who have emerged as the standout winners of the crisis.

The crisis has prompted concerns among US and EU security officials and regulators that some investors may seek take advantage of falling valuations to take strategic investments in companies which are sensitive to national security. Officials have been warning of a need to support companies weakened by COVID-19 to ensure they don’t have to accept “risky” capital. In formal guidance the EU recently advised member states to adopt a “strong EU wide approach to foreign investment screening”.

Finally, in what could be a glimpse of the future, the Financial Times visits one of the few Pret a Manger outlets to have reopened in London. With no more than five or six customers allowed in the shop at a time and a menu of just 11 products, the FT speculates that this is how retail may finally reopen after the crisis.

WHAT ARE COMPANIES SAYING?

Consumer and Retail

Boohoo

Boohoo, the online retailer, reported an initial marked decrease in year-on-year growth, but said performance had improved in more recent weeks “and we are now seeing improved year-on-year growth of group sales during April”. It added that the company was comfortable that it had sufficient financial headroom to endure the pandemic, with net cash of £241m as of the end of February. However, it is not yet appropriate to provide guidance for the financial year to February 2021.

Cath Kidston

Cath Kidston has placed its stores into administration while selling other parts of the vintage-inspired clothing company to its private equity owner. “While we are pleased that the future of Cath Kidston has been secured, this is obviously an extremely difficult day as we say goodbye to many colleagues,” said Melinda Paraie, chief executive of Cath Kidston.

Capita Plc

Capita, a consulting, digital services and software business, announced updates to senior management remuneration in the context of COVID-19. This includes withdrawing the 2020 annual incentive plan (STIP) for Jon Lewis, CEO, and Patrick Butcher, CFO, the Executive Committee, and other senior managers who participate in the 2020 LTIP. The 2020 LTIP award levels for Jon Lewis, Patrick Butcher and senior management are being reduced significantly. Capita remains focused on taking appropriate steps that will look to protect the interests of all its key stakeholders and best ensure the strength of Capita’s business in the long term.

Coca-Cola

Coca-Cola’s sales volumes have dropped by a quarter this month. The group said while it had an initial boost from customers stockpiling drinks at home, sales had been hit by the shutdown of bars, restaurants and stadiums. John Murphy, chief financial officer, said the company would prioritise its dividend but the company is “attacking all discretionary operating expenses and challenging what is essential”.

Fevertree

Fevertree, the world’s leading supplier of premium carbonated mixers, announced its preliminary results today noting that while COVID-19 will have a material impact on FY20 trading, the Group is financially strong and has well balanced revenue streams diversified across regions, channels and customers. However, it remains committed to paying a final dividend for FY19 of 9.88p per share, which brings the total dividend for the year to 15.08p, up 4% on the prior year.

John Lewis plc

John Lewis, ultimate holding company of John Lewis Partnership, provided a trading update in light of COVID-19 and the measures it undertook to prioritise safety, support Partners, the community and suppliers. The pandemic has significantly changed the trading patterns in both brands. In Waitrose, there has been strong sales growth up 8% year-on-year since 26 January. In John Lewis, there is a significant spike in online sales, up 84% year-on-year since the middle of March. John Lewis sales are down 17% year-on-year since the middle of March, and down 7% year-on-year since 26 January.

Heineken

Heineken, the world’s second largest brewer, has cancelled its interim dividend and cancelled executive bonuses after the pandemic cut into beer drinking globally. The company said that the second quarter of the year is expected to be worse and the economic impact of the pandemic is likely to affect results in the second half of the year. “Most countries where we operate have reacted by taking far-reaching containment measures. Our performance for the first quarter reflects the initial impact of those measures, and volumes in March were obviously heavily affected,” said Jean-François van Boxmeer, chief executive of Heineken.

Travel and Leisure 

Fiat Chrysler

Fiat Chrysler has drawn down €6.25bn from its credit lines. The carmaker group announced that it had tapped its credit facility “in light of the continuing uncertainty relating to the impacts of Covid-19”.

General Motors (Maven)

Maven, the car-sharing service offered by General Motors, said Tuesday it will shut down amid the coronavirus pandemic. “Car-sharing requires high capital investment, and it has shown lower long-term profitability opportunities for us than other GM business ventures.”

Financial Services & Real Estate

Aviva plc

Aviva plc, a British multinational insurance company, announced that COVID-19 will affect the format of its AGM this year. The group noted that shareholders must not attend the AGM in person this year if restrictions on public gatherings remain in force. The AGM will focus on the formal business of the meeting only.

Beazley plc

Beazley, a global specialist insurer, reported an early estimate of losses resulting from Covid-19 of $170m net of reinsurance. It has received claims on a range of policies, from event cancellation to business interruption in the US. The company said it had drawn down $140m of a credit facility to maintain its capital strength.

Hiscox Ltd

Hiscox is a global specialist insurer, headquartered in Bermuda and listed on the London Stock Exchange. Hiscox expects $150m of claims, also after reinsurance, although it said the figure could rise by $25m if restrictions on travel and mass gatherings last longer than six months. It reiterated that “Hiscox UK’s core small commercial package policies do not provide cover for business interruption as a result of the general measures taken by the UK government in response to a pandemic.”. However it added that it would work with the industry and customers to try to resolve the issue.

Land Securities Group plc

Land Securities Group plc is the largest commercial property development and investment company in the UK. The Board of Directors will be waiving 20% of their base salaries or fees for an initial period of three months effective 1 May 2020 and the money will be used to supplement the £500,000 support fund for the group’s charity partners announced on 2 April 2020.

The Unite Group Plc

Unite Students, the UK’s leading owner, manager and developer of student accommodation, retain its previous guidance for a £90-125 million reduction in Group cashflow in 2020. Further, it is taking a number of measures to mitigate the resulting risks and enable a rapid recovery including, a reduction in salaries to senior management and suspending bonus payments for Executive Directors in 2020.

Industrials

CRH

CRH, the FTSE 100 leading building materials company, has announced several new measures to mitigate the coronavirus’ impact in a scheduled trading update announced this morning. The Group’s ongoing share buyback programme has been paused while all “non-essential & discretionary expenditure” has been suspended. All leadership teams and board members have also taken a 25% pay cut while temporary layoffs and furlough arrangements have been implemented in some areas. This comes as the Group’s Q1 like-for-like sales rose by 3%

Drax

Drax, a FTSE250 electrical power generation company, said it had “significantly increased” its forecasts of the number of business customers who are likely to fail as a result of the coronavirus pandemic, and of higher bad debt. It expected a £60m hit this year from the coronavirus pandemic, although it said its forecast for full year adjusted earnings was in line with current analyst consensus of £398 million.

Texas Instruments

Texas Instruments, a global semiconductor design & manufacturing company, said it is using the 2008 financial crisis to model its outlook for the current quarter as it has “reduced visibility of customer demand” amid the coronavirus pandemic. The chipmaker expects to report revenues of $2.6bn-$3.2bn in the current quarter. Earnings per share are forecast to be between 64 cents and $1.04 per share.

TMT

Netflix

The California-based company added 15.8m subscribers in the three months ending in March, during the pandemic. However, Netflix warned that the boost in subscribers and viewership was temporary, and offset by a stronger US dollar, which weighed on its revenue in the quarter. Revenues in the quarter climbed 28 per cent year on year to $5.77bn, just above forecasts for $5.74bn. However, However, it noted that pandemic shutdowns have halted “almost all” filming around the world. “We expect viewing to decline and membership growth to decelerate as home confinement ends, which we hope is soon,” the company said in a letter to shareholders.

Snap

The parent company of the Snapchat messaging app said on Tuesday that it would not be able to provide forward guidance for the second quarter “given the uncertainties related to the ongoing Covid-19 pandemic and the rapidly shifting macro conditions”. Snap posted strong sales in its first quarter, but said that the pace of revenue growth in the second quarter so far had slowed dramatically as the coronavirus crisis squeezes its advertising clients. The group said that slowing revenue growth in March as the crisis took hold was offset by higher growth rates in the first two months of the year.

IN THE NEWS

International oil prices fall to more than two-decade low – Financial Times

U.S. energy secretary to urge House lawmakers to buy oil for strategic reserve – Reuters

UK inflation fell just before coronavirus lockdown, weighed by clothing – Reuters

Bank of England chief Andrew Bailey warns against lifting lockdown too early – The Telegraph