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Today ’s Newsflow Equity Research 05 Oct 2020 08:28 BST Upcoming Events Select headline to navigate to article
Greencore Solid FY20 outcome given challenging COVID- Company Events 19 backdrop 05-Oct Wizz Air; September 2020 Traffic Stats 06-Oct ARYZTA; FY20 Results SEGRO UK logistics take-up hits new annual record Harworth Group; Interim Results Norwegian Air Shuttle; September 2020 Traffic Stats Irish Economic View Budget deficit at the lower end of Restaurant Group; Q220 Results expectations 07-Oct Tesco; Q221 Results 09-Oct Air France-KLM; September 2020 Traffic Stats J D Wetherspoon; Full year results Irish Economic View Service sector in contraction again due to renewed restrictions FBD Holdings Business Interruption test case with 4 pub groups to start tomorrow UK Banks Sector newsflow Morses Club MCL appoints Graeme Campbell as CFO
Economic Events Ireland
United Kingdom
United States
Europe
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Greencore Solid FY20 outcome given challenging COVID-19 backdrop
Greencore has released a full year trading update in which it notes a sequential quarterly Recommendation: Buy improvement in revenue, adjusted EBITDA and cash flows. Pro-forma Group revenues during Closing Price: £1.02 Q4 were down 19%, which is up from the -36% delivered in Q3. This resulted in FY20 Group Jason Molins revenues of c.£1,265m (GBY £1,285m). Group adjusted EBITDA (post IFRS 16) for FY20 +353-1-641 9141 came in at c.£85m including in excess of £10m of non-recurring operating costs due to [email protected] COVID-19. This compares to our forecast of £106.6m which excludes non-recurring costs.
While Greencore note that UK consumer sentiment and economic activity is fragile and subdued, demand improved through the second half of the year as the UK economy slowly reopened. The Food to Go category reported revenues down 28% in Q4 (GBY -30%), a marked improvement from the -53% seen during Q3. The Group highlighted that its strong customer relationships and product range has supported new business opportunities that will help the rebuild in Group revenue. The other convenience food categories delivered a resilient performance with Q4 growth of 3% (Q3: 2%).
Net Debt (pre-IFRS 16) at the end of FY20 came in a c.£345m (GBY £325m) with an improvement in cash flow generation seen during Q4 as volumes started to recover. We note that Greencore has £578m of total committed debt facilities and could access the CCFF program which could provide a further £300m. Greencore has not drawn under this facility, and furthermore, has already agreed with its lenders for a waiver of its covenants for the September 2020 and March 2021 test periods.
Overall, we consider this a solid outcome for the Group in the face of an extremely challenging backdrop. While we acknowledge the uncertainty surrounding the duration of COVID-19 and its impact, we note the stocks undemanding valuation with a cal. 21 PE of 9.6x and EV/EBITDA of 7.1x.
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SEGRO UK logistics take-up hits new annual record
th Data released on Monday (5 October) by agents Savills, showed that by the end of the of Recommendation: Hold September 2020, warehousing and logistics space take-up in the UK reached 38.6m sq.ft, Closing Price: £9.56 beating the previous annual record set in 2016 (3.6% ahead) with three months the year still Colm Lauder to go. +353-1-641 6042
[email protected] Incredibly, so far, in 2020, 29% of the entire total take-up of space has been from Amazon, as the online retailer expanded rapidly during the COVID pandemic. Across the market, 54% of take-up was purpose built to meet tenant requirements, 26% of space take-up was second-hand and 19% was built speculative. The low level of speculative space, and high level of purpose built, further highlights the strong levels of occupier demand in the market. Vacancy is down to across all UK submarkets and locations also.
This is a strong data release for SGRO, the best positioned UK warehousing and logistics landlord, and will give further confidence of a strong NAV growth out-turn at year end.
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Irish Economic View Budget deficit at the lower end of expectations
Although the deficit is still large, Ireland is in a much better fiscal position going into next Dermot O’Leary week’s Budget that was anticipated a few months ago. September’s Exchequer Returns, +353-1-641 9167 [email protected] released Friday, show that the continued growth in the multinational sector and the resilience of income taxes continue to offset some of the costs of pandemic supports for businesses and workers.
At the end of September, total government revenue was down just 0.5% yoy, with tax revenues down by 3% yoy. Income tax, the biggest tax heading, was down by 2% yoy, and was €2.5bn ahead of expectations. Corporation tax was up 28% yoy and was €2.4bn ahead of expectations. Reflecting the shutdown of vast swathes of the economy due to the pandemic, VAT receipts fell by 20% yoy, but was still €772m ahead of expectations laid out in April.
Expenditure grew by 19% yoy in the first nine months of 2020, reflecting a 45% yoy increase in spending on employment affairs and social protection and a 16% yoy increase on healthcare.
In April, the government set out its expectations for a budget deficit of €25bn- €30bn in 2020. At this stage, it is likely that the deficit will be at the bottom of that range. This still represents a large fiscal hole, but the unexpected resilience of the multinational sector has been a welcome bounty this year once again. While such level of revenue is unsustainable into the medium-term, the same can also be said about the crisis supports. As long as the health crisis continues, it is right for the government to attempt to offset the impact of the weakness in the private sector. That is why Budget 2021 will all be about the implementation of counter-cyclical fiscal policy.
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Irish Economic View Service sector in contraction again due to renewed restrictions
An uptick in cases of COVID-19, the introduction of additional regional restrictions and Dermot O’Leary general concerns about the economic outlook all contributed to weakness in the Irish +353-1-641 9167 [email protected] services sector in September, according to the latest AIB/Markit PMI survey published this morning.
The headline index declined from 52.4 in August to 45.8 in September. The fall was the third largest in the survey’s history, behind the declines seen in Market and April. Business declined across all four sub-sectors, but the greatest was in the transport, tourism and leisure sector. The end of the summer and the closure of restaurants and bars in the capital were the contributory factors here. Unsurprisingly, employers continued to lay off workers in September, with the fastest decline being seen in the leisure and tourism sector.
The fall in the services PMI took the composite index to 46.9. Outside of the March- June 2020, this is the fastest rate of decline since January 2010. The fall is a renewed reminder of how the fate of the economy is heavily linked to the virus and the government decisions on how to control it. In this context, we can expect a further large contraction in the sector if the advice of NPHET for a full national lockdown is taken by government this week. Compared to the situation that prevailed in March, it looks like a disproportionate response.
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FBD Holdings Business Interruption test case with 4 pub groups to start tomorrow
The insurance industry in Ireland will be watching developments at the much-awaited Recommendation: Buy business interruption test case between FBD and four publican groups which commences Closing Price: €6.20 tomorrow, October 6, in the Commercial Court. The Irish Independent at the weekend notes Eamonn Hughes that the FBD interim CEO wrote to all staff on Friday that FBD “must defend the integrity of +353-1-641 9442 the insurance contract” in the case. In the letter to staff, the interim CEO noted that the [email protected] recent UK test case brought by the FCA was “regarded as favourable to the position of policyholders” though are expected to be subject to appeals and “we are closely monitoring how all of this impacts on our own case and policy wordings”.
The FCA test case in the UK is anticipated to provide “persuasive guidance” to the Irish courts and whilst the UK High Court broadly found in favour of the policyholders, it was not in all cases, with the costs identified by the UK insurers less than feared, with the net cost for Hiscox, for example, pitched at just c.40% of its stressed guidance figure. The FBD court case is anticipated to last about 2 weeks, with judgment in November. As such, its likely it will still be a few weeks before any clarity is brought to bear for the c.1,300 FBD pub customers and the wider insurance industry. It is also worth noting that pressures for the pub trade continue to rumble in the background as Ireland faces the potential for further tighter lockdown measures in prospect this week.
FBD has already taken a €30m provision to provide for its anticipated costs from the outcome of the case. This figure is a probability weighted estimate on a range of 3 outcomes – (i) FBD wins so just incurs legal costs (plaintiff & defendant); (ii) FBD loses but recent business trends apply (i.e. social distancing, so gross profit margins are reduced); and (iii) FBD loses and but profit margins pre-Covid apply. Currently, we suspect the probabilities are heavily skewed to the first outcome, but the UK ruling has likely reduced the likelihood of that outcome. A number of weeks ago we noted that the UK ruling had the potential to plausibly increase the cost for FBD to 1.5-2x the current provision on a gross basis, but importantly any adverse court judgement would obviously strengthen its case with its reinsurers. For the record, every additional €10m would impact FBD’s solvency capital by c.4ppts, so this looks manageable in the context of the 186% SCR at the end of June (which also includes its prior accrued €1 dividend per share). All the same, concern about the ruling is likely to continue to weigh on the stock for the next few weeks.
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UK Banks Sector newsflow
Plenty of coverage of the £36bn of BBLS lending in the weekend press – in the context of John Cronin fraud and ability to repay more broadly (nothing new in any of that you might say). +353-1-641 9187 However, a couple of other interesting news developments caught our eye, namely: i) The [email protected] Sunday Times report on the ‘generation buy’ scheme that is under consideration by Colin Jackson government notes that the PM is understood to have asked ministers to compile plans for +353-1-641 6050 long-term fixed rate mortgages with a 5% deposit, which would require a state guarantee [email protected] element given lenders’ reticence to originate at high LTV levels (i.e., a Help-To-Buy Scheme replacement, which would support continued buoyant transaction activity, which is not Barry Egan +353-1-641 6059 unhelpful for lenders); and ii) The online mortgage lender Molo (whose mortgages can be [email protected] agreed with borrowers within 15 minutes) has raised £266m in debt (Macquarie Group and
Patron Capital led the debt funding round) and equity (the equity funding round was led by Yabeo, a VC) following an “exponential” rise in applications through the pandemic – which serves to reinforce that the mainstream banks need to continue incurring significant ‘maintenance capex’ to digitise their businesses and generate substantial efficiencies (the article notes that Molo’s costs are c.50% lower than traditional lenders due to lower customer acquisition and processing costs) to compete in this new world.
Of course, it remains to be seen how adept new entities like Molo will prove to be at risk management but one wonders are they up against much in the first place. For what it’s worth, despite mainstream incumbent banker ‘confidence’ in the context of the historical data that informs new lending decisions, it seems to us that the process itself is nothing other than a box-ticking approach (that difficult to emulate / beat; really?) and we would be pretty cynical in relation to the true degree of risk management sophistication – so, we expect more and more new lenders to give the traditional players a ‘rattle’ in this respect. On this topic, we recently hosted a Zoom call for clients with the Chief Strategy Officer of Starling Bank, Declan Ferguson – a replay link and notes are available on request.
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Morses Club MCL appoints Graeme Campbell as CFO
Morses Club (MCL) announced this morning that it has appointed Graeme Campbell as CFO Recommendation: Buy with effect from 12th October, subject to regulatory approval. Campbell was most recently Closing Price: £0.40 CFO at rent-to-own operator BrightHouse, a position he held since 2018, before which he Colin Jackson held a number of other senior roles since joining the business in 2011, including Strategy +353-1-641 6050 and Digital Officer and Chief Information Officer. Prior to this, he held roles at Virgin Media [email protected] and Thresher Group. Campbell will take over from interim CFO Andy Thomson who will, importantly, remain in an executive capacity until the publication of the FY19 (year-end February 2020) results to ensure a smooth transition and regulatory handover. Thomson will then re-assume his role as NED of the Board.
Campbell looks like a capable CFO and his broader experience in a number of commercial roles will complement MCL’s existing leadership team. This is particularly the case as the lender expands its digital proposition and invests in technology to ensure the business is positioned to take capitalise on opportunities in the non-standard credit market. Indeed, Campbell will be able to lean into Thomson’s extensive knowledge of the business, given Thomson will re-assume his NED role – this should help to ensure that Campbell hits the ground running at MCL.
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