Portfolio COVID-19 update

Given the destruction wreaked upon the markets of late, it seemed like a reasonable time to reflect on the status of my investments.

My goals are pretty simple and can be distilled into 2 key points:

• Don’t lose money
• Build a portfolio of dividend paying investments

There is more finesse to these goals detailed here but it boils down to these two things. Since I’m looking to these investments to supplement my pension in a few years, I’m principally looking for income over capital growth.

Many businesses are experiencing disruption to both supply and demand, hardly a recipe for fat cashflows and pristine balance sheets. I’ve been through each of the investments that make up the core of my portfolio and the updates provided by each company over recent weeks, and tried to guess what the likely short-term and long-term impacts are likely to be.

Company	Business activity	COVID-19 update	Likely short-term impact	Likely long-term impact
Abcam	Provider of biological ingredients, kits and information to life sciences	9th March Chinese impact to operations quantified. Further impact outside of China unknown.	Reduced turnover and potential supply chain disruption. Possible increase in demand for products if relevant for COVID-19 research.	Little impact. Potential for increased funding for life sciences as a reaction to global pandemic which might benefit Abcam.
AG Barr	Soft drinks	23rd March Delayed annual results. Contained update on COVID-19.	Not material so far. No immediate interruption to production, hit to demand, balance sheet ok.	Little impact.
Compass	Contract catering	17th March Severe impact from March onwards.	Severe impact. Possible breach of debt covenants if impact continues.	Assuming customers remain trading, long-term impact should be positive. Compass should have scale to take market share from smaller businesses or to acquire these at lower prices.
Computacenter	Tech services	12th March	Increased demand for remote working. Potential for decreased technology infrastructure.	Likely to see increased spending in ecommerce and ensuring resilient remote working.
Foresight Solar	Solar energy provider	9th March FSFL Statement: No impact	Minimal impact.	Minimal impact.
Glaxosmithkline	Pharmaceuticals and consumer health products	5th February GSK Statement: Impact unknown	Reduced turnover and potential supply chain disruption. Potential increase in demand for any respiratory medicines.	Potential for increased funding for research and respiratory medicines.
National Grid	Energy infrastructure	None	Minimal impact.	Minimal impact.
Nextenergy Solar	Solar energy provider	20th March No significant impact. Cancellation of scrip dividend.	Minimal impact.	Minimal impact.
Nichols	Soft drinks	None	Reduced turnover and potential supply chain disruption	Little impact.
Reckitt Benckiser	Consumer goods	27th February Some disruption to Chinese supply chain	RB’s portfolio contains a number of household cleaning products which should benefit. Potential supply chain disruption.	Little impact.
Telecom Plus	Utilities and telecoms reseller	None	Little impact.	Little impact.
Tritax Big Box	Distribution centre property REIT	17th March Vague risk around global recession.	BBOX customers include retailers that could become distressed, e.g. M&S. These could look for rent reviews, or even potentially fail.	Potential for increased demand for online sales during COVID-19 outbreak. If ecommerce gets even more ingrained into consumer habits it could benefit BBOX.
Unilever	Consumer goods	30th January Statement: impact unknown	Little impact.	Little impact.

The true extent of the disruption is unknown, and fortunately for most of my investments is it unlikely to be crippling. The one exception is Compass. Compass is a catering company, providing catering services to business, governments, events, and have the market essentially split with Sodexho.

By my calculations if the current levels of disruption continue for too long, they may breach their debt covenants. Exactly what this means is unclear, if the loan defines covenant breaches as ‘potential’ or ‘actual’ events of default. The lenders may either have the right to demand immediate loan repayment – which with a cashflow crunch may not be ideal. Watch this space (from behind the sofa)

Compass update and back of the envelope calculations below:

"Compass' organic revenue growth for the five months ending 29 February 2020 was 6% as measures to contain the virus in our Asia Pacific region did not materially impact our business. Our operating margin during that five month period increased by around 10bps with the benefits from the restructuring programme in Europe coming through strongly. 

However, the acceleration of containment measures adopted by governments and clients in Continental Europe and North America have affected our expectations for the Half Year. The vast majority of our Sports & Leisure and Education business in these regions has been closed, and our Business & Industry volumes are being severely impacted.  Our current expectations are that Half Year 2020 organic revenue growth should be between 0-2%.  We are implementing significant mitigation plans to manage our costs, and at this stage expect the drop-through impact of the lost revenue to be between 25%-30% across the business.  As a result, our operating profit for Half Year 2020 will be £125 million - £225 million² lower than expected.

We are working to protect our cash flow and are pro-actively managing our capital expenditure and working capital.  We have significant headroom against a 4x net debt/ EBITDA covenant in our US Private Placement Agreements and we have substantial liquidity with a £2 billion committed Revolving Credit Facility³ maturing in 2024.  Stable outlooks have recently been reconfirmed on our A/A3 credit ratings."

Revenue for 2019 was £25.2 billion, the update indicates a 25% - 30% loss of revenue but it is not clear over what time period. Assuming the whole year that would put the 2020 revenue around £17.6 billion, similar to 2015 revenues, roughly where the share price is at the moment.

Based on the update, most of the impact has occurred in March, as for 5 months ending in Feb, revenue was up. For 1 month losses were material enough to result in projection of operating profit being £125m - £225m lower than expectations. EBIT consensus projections on the Compass website for 2020 are £1950bn, which breaks down roughly as a £163m per month. That's not going to leave a lot of spare change if the bad end of the losses plays out.

Net debt was last reported as £3.3bn, the update states that they need to keep net debt/EBITDA to 4x, which implies EBITDA needs to be greater than £800m to keep out of trouble with the bank. 2019 EBITDA was £2.5bn