By Powerscourt on 27/04/2020

Powerscourt Coronavirus Briefing – 27 April 2020

ANALYSIS

As UK Prime Minister Boris Johnson retakes the reins of government from caretaker PM Dominic Raab today following his convalescence from coronavirus, he faces a Cabinet and a country split over how and how soon to restart the UK economy.

Senior members of the Conservative Party and Party donors are putting pressure on the Prime Minister to start easing the lockdown. But, as the UK’s death toll passed the psychologically important milestone of 20,000, it won’t be business as usual.

Raab said in a weekend interview that the UK would need to adapt to a “new normal”, with social distancing remaining in place for many months: a tough prospect for hospitality businesses with low margins and a model based on high footfall.

The costs imposed by the slow down are illustrated by the recapitalisation of the airline industry and an internal memo from Airbus. Bloomberg reports that the Dutch and French governments are finalising plans to inject up to €11 billion into Air France-KLM in a mix of loans and guarantees. Meanwhile, Lufthansa waits for the German government to work out a route in conjunction with the governments of Austria, Belgium and Switzerland whose flag carriers it operates. A number of media outlets quote a letter from Gulllaume Faury to staff in which he said that the behemoth was “bleeding cash”. He laid the groundwork for further productions cuts (Airbus has already cut a third) and inevitable job losses for the business which has a pan-European supply chain and is a huge direct employer in UK, Germany, France and Spain.

Asian markets rose strongly on Monday morning with signs of global economies seeking to move past the virus. Previously hard-hit countries, including Italy and Spain, now have roadmaps in place to reopen businesses, while US States including Alaska, Georgia, Tennessee, Texas, and South Carolina have begun easing shutdown orders. The FTSE 100 and FTSE 250 each opened more than 1.5% higher than Friday’s close.

Some UK businesses are preparing to reopen, with a growing number of construction companies and retailers poised to reopen and reports that train operators are increasing the number of scheduled services.

Following a week which saw even relatively well-hedged tech companies such as Intel and Verizon pulling financial guidance, there are scant signs of optimism on the horizon for the coming week. Companies reporting this week include Alphabet, Amazon, Merck, Pfizer, Starbucks, Boeing, GE and Facebook. In a rare bright spot, however, Deutsche Bank preannounced Sunday that its first quarter results would beat expectations.

Meanwhile, in a sign of the likely lasting impact that the crisis has had on our way of working, German Labour Minister Hubertus Heil told a newspaper in Germany he was proposing legislation that would enshrine in law the right of employees to work from home, even when the crisis is over.

WHAT ARE COMPANIES SAYING?

Consumer and Retail

Adidas

The sportwear brand has warned it may swing to a loss in the second quarter after it missed earnings expectations in the first three months of the year. The company has said that it expects its first quarterly loss in more than four years for the second quarter after a 93% year-on-year drop to €65m between January and March. More than 70% of the brand’s global stores are closed due to the global lockdowns in the fight against the coronavirus pandemic, resulting in a 19% fall year-on-year in revenue in the first quarter. Between April and June, the company is expecting that sales will decline at more than twice that rate. Adidas also said that it was unable to give any guidance for the rest of the year as the uncertainty was just too great. Chief Executive Kasper Rorsted has said that “despite the current situation, I am confident about the attractive long-term prospects this industry provides for Adidas”.

InterContinental

The hotel group has agreed a waiver of its debt covenants and extra financing through the UK’s government-backed loan scheme. The UK-based company said that it now has access to $1.35bn cash and around $600m of undrawn bank facilities after the Bank of England approved its eligibility for the government’s Covid Corporate Financing Facility. IHG said that 12 out of its 470 hotels were still closed in China and that in the US only 10 per cent were closed “demonstrating the resilience of our mainstream, franchised business”. In Europe and Africa, around 50 per cent of hotels are closed and of those open around the world, occupancy was in the low to mid 20 per cent range it said. In order to see out the shutdown in global travel, the company has also agreed a waiver of its existing covenants until the end of 2021 provided that it meets a minimum liquidity test of $400m applied at the half and full year. Notably, revenue per available room for the first quarter of the year until the end of March is expected to have declined around 25 per cent overall with a 55 per cent decline in March.

John Lewis

The Times reports that the John Lewis Partnership is exploring whether it should bring in an outside investor to help to finance and launch a joint venture that would reduce its reliance on retailing. Equally, it is also supposedly considering never reopening some of its less viable department stores after the national lockdown ends.

Mind Gym

The provider of human capital and business improvement solutions has announced a trading update ahead of reporting its full year results for the year ended 31 March 2020. Notably, the company has said “given the uncertainty around the impact of COVID-19, it is not yet possible to assess its effect on the Group’s performance for the current financial year”. Consequently, the Group is withdrawing guidance for the year ending March 2021.

Financial Services & Real Estate

Deutsche Bank

The investment bank and financial services company has announced results for the first quarter 2020 above market expectations. However, Deutsche Bank has said “the short-term implications of the COVID-19 pandemic make it difficult for the bank to accurately reflect the timing and the magnitude of changes to its original capital plan”. It added that the banks “priority is to stand by its clients without compromising on capital strength”. Consequently, it is possible that the bank will “fall modestly and temporarily below its previous CET1 target of at least 12.5%”.

Admiral Group

The company has become the largest UK insurer to suspend its dividend plans. It is still planning to pay its 56.3p final dividend, but it has suspended plans to pay a 20.7p final dividend and will review the decision later in the year. Specifically, it announced that its Board is “recommending an unchanged normal dividend” but is “suspending the recommendation to pay a special dividend”. David Stevens, CEO, stated that “it has been a very difficult decision to suspend the special dividend as we are aware of the importance and impact to our shareholders and staff.  However, the Board and I believe that this is the prudent and right thing to do at this time”. Moreover, David Stevens has confirmed that the normal dividend payable to him will be donated in full to his charitable foundation “to fund support for charities experiencing reduced income and increased needs during the Covid-19 crisis”.

The Property Finance Group

The property franchise has formally appointed Gareth Samples as CEO with effect from 30 April 2020. The company has stated that since the time of his appointment Gareth Samples has been working alongside current CEO Ian Wilson, communicating with franchisees, participating in the recent final results investor roadshow and critically, forming strategy on the business’ response to the impact of COVID-19.

Industrials & Transport 

Airbus

The aerospace company’s Chief Executive Guillaume Faury has told employees in a letter that the company is rapidly “bleeding cash”, which threatens its “very existence”. Airbus said on April 8 that it would slash production by a third, but Guillaume Faury told the workforce of 133,000 on Friday that the production cuts were not the worst-case scenario for the company. Airbus has lost a third of its business in a matter of weeks, as the pandemic has hit airlines’ revenue and made them reluctant to accept new jets.

Redrow

One of Britain’s largest housebuilders, which on the 27 March announced the closure of all its sites, has now said that it intends to start mobilising sites the week commencing 11th May 2020 with a phased return to construction on 18th May 2020. The company has said “mobilisation will include putting robust social distancing protocols and physical measures in place”. Additionally, it has developed “rigorous social distancing protocols that will be supported by strict arrangements to ensure they are consistently applied”. Particularly, it will have “an e-learning module for all Redrow employees, induction videos for contractors, appointed Covid Supervisors for each site and enhanced signage and PPE”.

Bayer

The German pharmaceutical group has reported that group sales have increased by 6%, partly due to coronavirus-induced stockpiling, but warned that the net effect of the pandemic on the business for the year is unclear.

Ashtead

The Industry equipment rental company has said that it expects underlying profit before tax for the year ending in April 2021 to be £1.05bn, as the uptick in demand for rentals related to its speciality service business mitigated reduced general tools renting. Brendan Horgan, Group Chief Executive, commented: “We are grateful for and extraordinarily proud of our team members who continue to respond as essential service providers during a time when our communities are in need…Looking forward, I am certain the swift actions we took during these unprecedented times and the strength of our balance sheet will serve the Group well”.

Anglo Pacific Group PLC

The natural resources royalties business based in London has announced a “minimal impact of COVID-19 on the Group’s royalties thus far with Q1 2020 portfolio contribution of £12.6m in line with Q4 2019”. Equally, it notes that “commodity prices which determine the Group’s revenue in Q1 2020 were largely ahead of prices during Q4 2019 but far lower than Q1 2019”.

Norwegian Air Shuttle

The airline has warned that both its short-haul and long-haul airplanes are likely to remain grounded for the next 12 months and that a full recovery would not take place until 2022, laying bare the scale of the crisis facing the airline industry. As part of a plan for a $1.2bn debt-for-equity swap to try to ensure the embattled low-cost airline’s survival, Norwegian Air Shuttle has said that its base case was that its fleet would remain fully grounded until April 2021 apart from the seven aircraft currently flying in Norway. It would then begin a gradual ramp-up of both its European short-haul and long-haul operations to the US and Asia over the rest of 2021 before normal activity returns in January 2022.

Energy

PetroNeft Resources

The international oil and gas exploration and production company focused on Russia has provided an operational update. Notably, its successful re-entry of the C-3 well. David Sturt, Chief Executive Officer, commented that initially the company had planned to progress testing in other wells but “in light of the current economic situation combined with the coronavirus shut downs in Russia, (the company) believe it is prudent to suspend operations for now”.

IN THE NEWS

Ministers plan how to get Britain back in business – The Times

BoE warns bank loan reserves risk choking business funding – Financial Times