By Powerscourt on 06/05/2020

Powerscourt Coronavirus Briefing – 06 May 2020

ANALYSIS

The lockdown resolve is fraying around the world.

Last night the US sent a clear signal about its perspective on the crisis when President Donald Trump confirmed earlier reports that Mike Pence, the Vice President, was preparing to wind down the coronavirus task force which he chairs, even as the number of US deaths from the virus spiked at over 70,000. Pence indicated that the task force would wind down by Memorial Day, May 25. President Trump ventured outside Washington DC for the first time in weeks to visit a factory in Arizona.  He acknowledged that reopening could cost lives but said: “We cannot keep our country closed for the next five years.”

On Tuesday Neil Ferguson, the scientist at Imperial College London whose research prompted the lockdown when he predicted a doomsday scenario for the UK if it allowed the virus to run its course unchecked, was forced to resign his role as a government adviser after admitting he had broken the lockdown rules when his married lover visited his London home. We can expect speculation that the news story was a skewering of Ferguson for political motives.

Elsewhere, Airbnb said it had seen evidence of a recovery in travel bookings with a strong uptick in demand, particularly from Denmark and the Netherlands. The surge in demand wasn’t enough to prevent a 25% cut to the company’s workforce.

Signs of growing social normalcy are probably not going to be enough to stave off a severe recession according to the Federal Reserve Vice Chair, Richard Clarida, in an interview with CNBC. He predicted a surge in unemployment to levels not seen since the 1940s. These remarks, alongside a report that the Chinese government is aware of growing resentment about its handling of the crisis, helped take the edge off Asian markets, which were lower early Wednesday.

This continued economic drag is the dilemma which European policymakers are grappling with as they seek to phase out job support programmes without tipping millions of workers into redundancy or poverty. This will be the backdrop for the UK government as its prepares to unveil its economic roadmap on Sunday, after it emerged that the UK’s death toll is now higher than that of Italy’s.

 

WHAT ARE COMPANIES SAYING?

 

Consumer and Retail

Ocado

Ocado said that sales in its retail joint venture were up by two-fifths so far in the second quarter, but still withdrew its full-year financial forecasts citing uncertainty about consumer behaviour in the later stages of the Covid-19 pandemic. The online retailer had previously been expecting revenue growth of 10-15% for the year to December 31. In a trading update ahead of its annual meeting, the group said: “Although we expect the long term shift towards online grocery to accelerate post-crisis, there remain many uncertainties about the length of the crisis, customer reaction immediately post and its long term impact on customers’ disposable incomes. We have suspended our guidance for retail revenue for 2020 until we can accurately forecast likely outcomes”.

JD Sports

Britain’s competition watchdog has made good on its threat to block sportswear retailer JD Sports’ takeover of smaller rival Footasylum, saying it would leave shoppers worse off and requiring JD to sell the chain. JD said it was considering an appeal and that, in the context of the coronavirus-driven pressures on retailers, the decision put at risk the future of Footasylum and its 2,500 employees. JD Sports said that it “fundamentally disagrees” with the Competition and Markets Authority’s decision to block the takeover, since its conclusion fails to take proper account of the rapidly evolving competitive landscape and the “likely permanent” impact of coronavirus on sports fashion retailers.

ITV

ITV has reported a 42% slide in ad revenues in April – significantly worse than previously anticipated – as the coronavirus pandemic forces companies to cut back on marketing. The British free-to-air television network had warned in March that ad revenues were likely to drop 10% in April as the travel industry postponed campaigns. ITV has suspended the majority of its productions across the world since mid-March due to the lockdowns and social distancing measures imposed by authorities in many countries. It said on Wednesday it was cancelling its final dividend for 2019 and was unable to provide guidance for the second quarter of 2020 or the remainder of the year as the outlook remained “uncertain and is changing rapidly”. The group has furloughed 800 members of staff – 15% of its workforce – and said it would double its overhead savings this year to £60m. Carolyn McCall, Chief Executive, said: “ITV has taken swift and decisive action to manage and mitigate the impact of Covid-19, by focusing on our people and their safety, and by continuing to reduce costs and tightly manage our cashflow and liquidity”.

Airbnb

Airbnb, which said yesterday it was cutting 25% of its workforce, has highlighted a surge in domestic bookings in Denmark and the Netherlands. Speaking to the Financial Times, the Chief Executive Officer Brain Chesky said: “The recovery is better than what we had forecast even two weeks ago. Is it a temporary recovery? Is it a permanent recovery? Nobody knows”. Globally the company now expects its 2020 revenue to be half of the $4.8bn it took in last year.

 

Financial Services & Real Estate

UniCredit

Italy’s biggest bank has posted a €2.7 billion loss in the first quarter after writing down loans in anticipation of the damage caused by the pandemic. Analysts had on average looked for a €1.53 billion loss in a consensus compiled by the bank, on revenues of €4.48 billion. UniCredit, which also has operations in Germany and Austria, said revenues came in at €4.38 billion, down 8% from a year earlier, hurt by a sharp drop in trading income amid market turmoil despite higher fees. The bank booked €1.26 billion in net loan writedowns in the period, it said. It also took a €1.3 billion hit in the quarter to pave the way for 5,200 voluntary layoffs it agreed with unions in April as envisaged by a business plan unveiled in December. UniCredit warned last month it would book €900 million in additional loan loss provisions in the first quarter to take into account an expected 13% contraction in the euro zone’s 2020 gross domestic product. When the pandemic hit, UniCredit was just emerging from a successful restructuring which allowed it to reduce impaired loans to 5% of total lending from 16% when French investment banker Jean Pierre Mustier took over as CEO in mid-2016.

Virgin Money

British lender Virgin Money swung to a first-half loss after setting aside £237 million to handle loans likely to go bad because of the coronavirus crisis. The bank reported a pre-tax loss of £4 million for the six months ended March 31, compared to a £50 million profit a year earlier. The pre-tax loss was in line with expectations, according to an average of analyst forecasts compiled by the company. David Duffy, Chief Executive, said: “We enter this period from a position of strength with a defensive loan book and resilient capital position, meaning we are well-placed to help our customers and colleagues through the crisis”.

Credit Agricole

Credit Agricole has reported a 16.4% decline in quarterly profit, as France’s second-biggest listed bank almost tripled the amount of provisions to protect itself from potential loan defaults caused by the coronavirus crisis. Credit Agricole avoided equity trading losses that hit its French rivals BNP Paribas and Societe Generale, which have a big market share in the business. Its markets activities that are focused on fixed income trading rose by 14%. Net profit slid to €638 million from €763 million a year ago. Revenue rose by 7.1% to €5.2 billion.

Metro Bank

Britain’s Metro Bank reported a modest dip in lending in the first quarter and a £77 million rise in total deposits to £14.6 billion pounds as customers shrugged off lower fixed term deposit rates. The lender said the impact of the COVID-19 pandemic on customers was difficult to predict with any certainty and it would provide an update on the economic consequences at its half-year results. Daniel Frumkin, Chief Executive Officer, said: “Despite the unfolding situation, I’m pleased that deposits continued to grow in the first quarter. Our ambition to become the UK’s best community bank has never been more important, and we’ve made early progress on the strategic initiatives announced earlier in the year”.

Co-Operative Bank

The Co-Operative Bank issued a Q1 update this morning, in which it reiterated its consistent operational resilience with 100% of its branches and call centres still being open. Equally, it highlighted that it is building momentum in its SME banking business with 11% year on year deposit growth. Andrew Bester, Chief Executive Officer, said: “All of our branches and contact centres have adapted and are open to serve customers safely throughout this period and we are providing payment holidays for approximately 17,000 mortgage, loans and credit card customers to date, and additional overdraft facilities for over 350,000 current account customers. Since our accreditation for the Coronavirus Business Interruption Loan Scheme we have worked tirelessly to make these facilities available. This is now live for our SME customers and we have started to process customers’ applications. We are now working to be able to offer Bounce Back Loans as soon as possible. There is much more to do, but we are committed to helping individuals and small businesses through the financial strain they are facing, and we hope we can make a difference to helping drive economic and social recovery in the months ahead”.

Hiscox

The FTSE 250 insurer said last night that it would raise about £400 million as the Lloyd’s of London insurer warned that it could take a £250 million hit to cover British businesses that cannot operate because of coronavirus. The capital-raising comes after the company was pushed into the spotlight in recent weeks by a bitter row with more than 500 of its UK business customers over unsuccessful claims relating to Covid-19. Hiscox said last night that it would use the new funds to expand in the United States and to “prudently position the group to withstand a range of downside scenarios”. While Hiscox stuck to its stance yesterday that the policies are not triggered by the lockdown, for the first time it provided estimates of the hit it might suffer if it were to pay out on UK business interruption claims. It said that about 33,000 of its British commercial customers had bought property insurance that had an element of business interruption cover.

Londonmetric

A FTSE 250 warehouse investor has raised £120 million in a share placing to meet the call of retailers that want to raise money by selling properties and leasing them back. Londonmetric said that it had a pipeline of deals to buy logistics properties from retailers that are trying to improve their cash positions. Andrew Jones, Chief Executive, said: “We are seeing opportunities of quality that don’t normally make themselves available in an environment where the pitch is a bit less crowded. I’m not going ‘this is cheap’, but we are seeing opportunities that don’t normally come available — and competition is weaker than it was a few months ago”.

Intrum

Europe’s biggest debt collector has reported a drop in first-quarter profits and said effects of the pandemic and portfolio revaluations weighed. Profit before interest, tax and items affecting comparability was 1.10 billion crowns ($112.2 million) against a year-earlier 1.35 billion. Operating profit tumbled to 459 million crowns from 1.35 billion due to portfolio revaluations totalling -636 million and lower income from participations in associated companies. The Swedish firm said authorities’ initiatives to slow the pandemic and lower activity in legal systems in March hit its business mainly in southern Europe.

Direct Line

The insurer has reported a 4.7% increase in gross written premiums increased in the first quarter, driven by a positive performance in motor insurance, up 6.2%. Despite a 70% drop in motor claims in April and a net impact in travel of around £25 million in excess of the normal level of claims, Direct Line reiterated its 2020 target of a combined operating ratio of 93-95%.

 

Industrials & Transport 

Virgin Atlantic

Virgin Atlantic is to cut 3,150 jobs, about a third of its workforce, and will quit Gatwick airport after failing to secure a government bailout. While leading long-haul carriers in Europe, such as Lufthansa, Air France and KLM, are surviving on state aid, Virgin, the UK’s only other transatlantic carrier after British Airways, is having to fend for itself. The carrier is leaving Gatwick in order to concentrate on its operations at Heathrow and to run a subsidiary operation out of Manchester. Announcing the move, Shai Weiss, Virgin Atlantic’s Chief Executive, said: “We have weathered many storms since our first flight 36 years ago, but none has been as devastating as Covid-19 and the associated loss of life and livelihood for so many”.

Qatar Airways

Qatar Airways’ Chief Executive has told staff to expect a “substantial” number of redundancies as the national carrier struggles with the impact of coronavirus. In a note, Akbar Al Baker said the Gulf airline could not sustain current staffing levels and that the layoffs would include cabin crew. He wrote: “The global outlook for our industry looks grim and many airlines are closing or significantly reducing operations…Unfortunately, Qatar Airways is not immune to this challenge”. In a statement, the company confirmed it would make “a number of roles” redundant, declining to comment further.

National Express

The intercity and inter-regional coach operator has laid out plans to raise up to £240 million by placing 102 million shares with institutional shareholders. Individual shareholders, which have seen their shares fall almost 50% since the start of the year will not be able to take part in the dilutive placing, but executive directors will. The company, which has seen a collapse in activity due to nationwide lockdowns, said the group’s core profit in 2020 would fall about 40% under a modelled downside scenario.

BMW

BMW has reported a 133% rise in first-quarter operating profit, due to the absence of a one-off provision in the year-earlier period, but said the impact of the coronavirus could erode demand and profit. Earnings before interest and taxes rose to €1.38 billion versus €589 million in the same period a year earlier. Its EBIT margin for its autos division reached 1.3% from a negative 1.6% margin in the year-earlier period. The company late on Tuesday forecast a full-year automotive EBIT margin of 0% to 3%, versus the 2% to 4% range estimated before demand was decimated by government restrictions on movement worldwide aimed at slowing the coronavirus outbreak.

Biffa

The UK’s leading sustainable waste management company today issued a further update regarding the impact of the pandemic on its business and on its financial position, “following strong support from its lending banks”. For the financial year ended 27 March 2020, the Group had over £150m of available liquidity, which Biffa states “leaves (it) well placed to weather these unprecedented trading conditions”. The company added that “the Group’s banks have been very supportive…covenant amendments and additional liquidity headroom have been agreed in order to cater for all modelled scenarios”. Notably, Biffa said that following receipt of an investment grade rating from one of the rating providers, it also has an opportunity to access the Government’s Coronavirus Corporate Finance Facility Commercial Paper Programme and “is actively working with the Bank of England to pursue this opportunity”. Lastly, Biffa also confirmed that the announcement of its FY20 full year results, originally planned for 27 May 2020, will be postponed until 5 June.

Fresenius

The German healthcare group has beaten first-quarter net income expectations, citing a spike in demand for drugs and devices for COVID-19 patients in Europe and the United States and German legislation to ease the financial burden on hospitals. Fresenius’ first-quarter net income came in at €465 million, above analysts’ average forecast of 421.8 million euros, according to a Refinitiv poll. The group said it would revisit its 2020 guidance when publishing its second quarter results, when it could more reliably assess the impact of the pandemic. Excluding that impact, Fresenius maintained its earlier 2020 outlook for net income growth of between 1% and 5% from a sales growth between 4% and 7% in constant currency terms.

Lanxess

The German specialty chemicals company has cut its full-year profit guidance, saying it expected the impact of the pandemic to intensify in the second and third quarters. The former Bayer unit added the outbreak had hardly restricted its deliveries so far, with its largest production facilities remaining operational. Lanxess forecast its 2020 EBITDA to come in between €0.8 billion – €0.9 billion, compared to March forecast of €0.9 billion to €1.0 billion. In the second quarter, Lanxess expected EBITDA before exceptional items to come in between €200 million and €250 million. Chief Executive Matthias Zachert said: “So far, we have been able to keep the economic impact of the coronavirus pandemic within limits – mainly thanks to our balanced portfolio”.

Smith & Nephew

The FTSE100 medical products maker has said sales in April nearly halved as more patients postponed elective surgeries due to coronavirus-driven lockdowns. The company said revenue in the three months ended March 28 fell 7.6% to $1.13 billion on an underlying basis and April sales slumped 47%. Analysts on average were expecting first-quarter sales of $1.12 billion, down 8.1% on an underlying basis, according to a company-compiled consensus here of 8 analysts. Ronal Digglemann, Chief Executive, said: “While there is still much uncertainty, Smith & Nephew has the financial strength to withstand this period and, as demand increases, we are ready to step up and support customers through our robust supply chain, innovative products and some new ways of working”.

 

IN THE NEWS

Coronavirus: Britain passes Italy to register highest death toll in Europe – The Times

German court ruling casts doubt on European monetary policy – Financial Times