Q3 Results Analysis - 9fin

Sales Fall -3.9% Across European High Yield

Reproduced below is an analysis piece for 9fin subscribers published last week

By Huw Simpson | huw@9fin.com

Key Trends

  • Overall, we’ve tracked an average sales drop of -3.9% across European HY in Q3 20 vs. Q3 19. This compares favourably with the -16.5% drop seen in Q2 20 vs. Q2 19. 

  • By Industry, performance was beta driven, winners include Consumer Staples (+6.0%) and Utilities (+2.4%), losers include Energy (-31.1%) and Industrials (-9.5%). 

  • By Country, the Nordics had the best and worst performers, largely due to Oil & Gas  exposure (Sweden -1.0%, Netherlands -1.3%, and, Norway -7.0%, Finland -14.5%). 

  • By Rating, Double BB -1.7%, Single B -2.8%, Unrated -7.7%, and Triple CCC -30.7%. 

  • By Sector; Hotels, Resorts & Cruise Lines again experienced the largest fall (-50.9%), while Health Care Equipment & Services (+17.4%) saw the best performance. 

  • On an LTM basis, for Q3 20 we see an average sales drop of -5.8% versus the full year, and -0.9% versus Q2 20. 

By Industry

Winners

  • Consumer Staples (+5.98%) locked in most convincing gains, alongside other comparably stable sectors; Utilities (+2.41%), Healthcare (+1.82%), and Real Estate(+1.60%).

Losers

  • Energy (-31.09%) saw outsized losses, followed by Industrials (-9.51%), Materials(-7.66%), and Consumer Discretionary (-6.01%).

By Country

Winners

  • Sweden marks the best performing country in European HY*, losing an average of just -1.0% versus the comparable Q3 19 period. Home alarms proved popular (Verisure +16.7%), along with stolid performance among various stable Utility and Real Estate firms (Polygon +8.6%, Bravida +2.4%, Kungsleden +1.0%). 

  • As with Norway (below), the Netherlands saw top line hits from Oil & Gas names (Nostrum -43.3%, Fugro -18.8%) but these were balanced with some ‘lockdown-winners’ (Maxeda +21.3%, VodafoneZiggo +2.3%). 

Losers

  • Finland (-14.5%) bottoms out the list, weighed down by Finnair (-88.7%), Ferratum(-23.3%) and Outokumpu (-21.1%). Spain fared little better, with a string of lower rated names tracking substantial reductions (eDreams -76%, Codere -58.4%, Haya Real Estate -46.4%, Cirsa -36.7%). 

  • As you might expect, Norway shows the unhappy result of combined exposure to Oil & Gas (PGS -69.2%, Aker Solutions -22.3%, Aker BP -5.5%, DOF ASA -2.6%) and Transportation (Hurtigruten -70.2%).

*Sample reduced to countries with at least 5 reporting companies

By Rating

Quarterly sales changes are ordered as we would assume, with Double BB at -1.7%, Single B at -2.8%, Unrated at -7.7%, and Triple CCC falling by a sizable 30.7%.

  • The CCC fallout strings from a long list of High Yield’s most stressed names, including: AMC Entertainment (-90.9%), TUI (-83.6%), Tap Air (-80.1%), eDreams(-76.5%), Hurtigruten (-70.2%), Swissport (-61.1%), Aston Martin (-49.1%), Europcar(-46.7%), and McLaren (-44.9%) to name a few.

  • Few names in this group managed positive returns, limited to DIA (+2.5%, firm cites ‘transforming effects’ from reorganisation), Garrett (+2.9%, albeit filed for bankruptcy protection on 20-Sep), Transcom (+7.6%, organic growth from predominantly existing clients), and Parts Europe (+8.8%, strong bounce-back recovery in demand).

  • Among the unrated names, Finnair (-88.7%) tracked the most dramatic plunge, with German car rental firm Sixt (-52.8%) also showing a considerable slide (Triple CCC Europcar -46.7%). At the upper end, Italian amico Campari (+11.6%) benefitted from favourable weather and a staycation-led boost to aperitif consumption.

By Sector

Winners

  • Health Care Equipment & Services (+17.4%); with Cerba (+60.0%, o/w +50.0% LFL) topping the charts, largely from catch-up on legacy business postponed by lockdown, and strong Covid testing demand. Synlab (+53.3%) also benefited from testing - which comprised ~20% 9M 2020 revenues, more than offsetting core volume losses.

  • Communications Infrastructure (+11.0%) traded well, in large part due to positive support from the new shift to ‘work from home’ and increased digitization. Also Cellnex (+60.9% o/w mostly acquisitions), Equinix (+8.8%) and Cogent (+3.9%).

  • Firms in the Food Products Sector all saw gains bar Aramark (-31.9%), as demand for catering remained subdued. Iceland (+17.2%), Picard (+14.8%), and Nomad Foods(+6.6%) again saw outsized demand, although slightly lessened versus Q2, as lockdown measures eased and “Eat Out to Help Out” caused a slight drop-off. As we might expect, ECB research confirms lockdown restrictions led to overweighting of consumer spending on Food products, with the trend yet to fully unwind. 

Losers

  • For a second quarter in a row, Hotels, Resorts & Cruise Lines experienced the largest fall (-50.9%), although this is a marked improvement on Q2’s drop of more than 90%. All three constituents - Merlin (-59.1%), Travelodge (-57.8%), and Center Parcs(-35.9%) - continued to suffer from lower occupancy rates due to social distancing and fresh venue closures from second wave lockdowns.

  • Another likely sector, Transportation and Logistics, dropped -38.6%. Demand for air travel remains muted; Finnair (-88.7%), BA (-85.2%), Tap Air (-81.2%), SAS (-77.4%), and Lufthansa (-73.7%). Pre vaccine announcement, S&P predicted (12-Aug) global air passenger traffic would drop by 60-70% in 2020 vs. 2019, with a return to pre-COVID levels by 2024 - the extent to which a viable vaccine can shorten this timeline is to be seen. Shipping was similarly affected, with Carnival (-99.5%), Hurtigruten(-70.2%), Stena (-18.8%) both posting heavy reductions. Some freight orientated shipping proves the exception, as initial Covid disruption gave way to stable growth and even some rebound; Ship Finance (+3.8%), CMA CGM (+6.1%), SGL Transgroup(+19.7%).

  • Energy, Oil & Gas (-33.1%), and related Oilfield Services (-28.6%) also saw a dramatic fall in sales. Raffinerie Heide (-49.3%) and PGS (-69.2%) top the respective lists, thanks to demand disruption (jet fuel in particular), ‘historically’ low margins, and project postponements.

*Small sample size where fewer than five reporting companies. Mean taken as best measure of average due to smaller category sample sizes.

LTM Basis

Turning to sales progression throughout the year, here we take LTM values to account for any seasonality. Overall, for Q3 20 we see an average LTM sales drop of -5.8% versus the full year, and -0.9% versus Q2 20.

LTM Sales by Industry

  • As expected, most Industries are in the red versus full year numbers, with Energyfeeling the heat (-19.3%, and a further -8.7% on Q2 20). Consumer Discretionarytrades next lowest (-16.1%) although the greatest declines were seen in the second quarter - perhaps a reflection of re-opening economies and higher saving rates driving ‘bounce-back’ consumption. While the majority of this effect may yet be still to come (the IFS documents a ‘very partial’ recovery in UK consumer spending to 30-Sep), this could well be tempered by a related drop in household incomes from redundancies.

  • Comparing Q2 20 to Q3 20, we do see some improvements. IT (+0.3%), Healthcare (+0.6%), Consumer Staples (+0.4%), and Utilities (+1.9%) all marked positive gains. Real Estate had modest but steady gains (+0.8%) - with the exception of the lowest rated firm in this Industry, Haya (-14.4%, see our note here) - with Modulaire Group (+9.8%, mostly acquisition led), and MPT, the US healthcare REIT (+7.0%, expects 98% of annual rental and interest collections) marking the largest gains.

LTM Sales by Country

As with the quarterly figures, we see nordic countries bookend the split versus the full year, with Netherlands and Sweden even showing some growth. While Spain and the UKnarrowly avoid the wooden spoon, poor performance in Q3 20 vs. Q2 20 highlights the continued difficulties of many firms. 

  • In the UK, for Q3 vs. Q2 many Consumer Discretionary Triple CCC names have continued to suffer from the pandemic as we add in another quarter of top line squeeze; Merlin (-31.7%), Travelodge (-22.6%), Aston Martin (-16.7%), McLaren(-13.9%), Center Parcs (-13.4%) and Moto (-9.1%) to name a few - as well as some Double BB Transportation names; BA (-32.1%), Heathrow (-25.9%). 

  • For SpainConsumer Discretionary again dominates the worst performers (eDreams-26.5%, El Corte -8.8%, Tendam -7.9%), with the Gaming Sector also underachieving (Codere -20.0%, Cirsa -11.6%).

LTM Sales by Rating

Versus the full year, we again see the greatest sales dropoff for Triple CCC names (-21.9%), with a notable decrease from Q2 20 to Q3 20 (-8.8%). The second largest fall, from Unrated names (-12.1%), comes in spite of a relatively modest drop in Q2 20 to Q3 20 (-2.5%), reflecting the sizable fall already baked in to Q2 numbersSingle B (-3.0% / -0.6%) and Double BB (-3.3% / -0.4%) are mostly comparable over both periods (Q3 20 vs. Q4 19 / Q3 20 vs. Q2 20).

LTM Sales by Sector

For reference, we provide LTM Sales by Sector, which incorporate many of the factors discussed above.

Link: Graph

Note: Median values taken throughout the report unless otherwise stated