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BDO AIM Sectorwatch
Leisure and hospitality
Key collaboration trends for the office of the future
Technology and media
Retail
Transport and logistics
Is Office 365 a no-brainer for an SME or mid-market business?
by Charles Ellis
Introduction
2020 got off to a slow start with more fizzle than bang. Like the previous quarter, it was one with a dearth of IPOs as companies are seemingly holding out for less volatility with a likely effect of backing up the pipeline. COVID-19 will not help improve the number of new arrivals and it is likely to be a sustained trend, further increasing the risk that AIM will lose its vibrancy and impact longer term health. It is perhaps unsurprising that both the transport and logistics, and retail sectors were amongst the hardest hit as a result of Coronavirus (COVID-19) and the subsequent social distancing measures enacted across the UK. However, mirroring public markets around the world, all sectors saw a decline over the period and there were no real stand-out performers. It is less surprising to see technology and media report some of the ‘best’ results (very relative, of course) over the quarter, but the performance of leisure and hospitality should not be overstated as there is likely be a longer tail of repercussions for the sector. In January, the Barkby Group who operate in a range of sectors including real estate, hospitality, automotive and life sciences moved its listing from NEX Exchange to AIM as part of a reverse takeover. The 7 Jan opening share price was 28.5p, rising to 41.5p towards the end of the month and was just over 23p in early May. They have just signed an agreement with Cambridge Sound Technologies UK for the exclusive design and acquisition of the intellectual property rights related to a device to improve and facilitate natural sleep. Later in this update we discuss FRP Advisory Group who raised £80 million at listing and Inspecs, a Bristol based eyewear manufacturer who raised £23.5m. I hope you find this an interesting read.
Charles Ellis
Audit Partner
charles.ellis@bdo.co.uk
DirectAIM
A Quarterly Update for AIM Companies Q1 2020
The sluggish rate of new Initial Public Offerings (IPOs) on the AIM market continued in Q1 2020 with a total of three completed in the period. This slow start to the year defied a swelling tide of optimism that increased political stability in the UK would potentially help to unblock the pipeline of prospective IPOs that had previously been held back. However, 2020 thus far has provided fresh obstacles for the market thanks to a novel coronavirus (COVID-19) and subsequent lockdown. COVID-19 and the associated government action around the world saw almost half the planet’s population under some sort of restriction toward the end of Q1. This had immediate and significant repercussions for the global economy, many of which will continue to be felt long after the end of the quarter under review. Firms globally experienced squeezed supply chains, labour force shortages and stifled cash flow. Capital markets around the world suffered a severe shock, with indexes in London and the US experiencing their worst day’s trading since October 1987 during the quarter. The AIM market was not immune. Through the back end of February and into March the FTSE AIM All-Share index experienced a sharp correction, losing 40% of its value. However, amidst the difficulty there were some foreseeable upticks: Life Sciences companies involved in the research and design of pharmaceuticals or testing kits for COVID-19 bucked the trend. For example, one constituent, Synairgen, saw its shares surge after news that it was commencing clinical trials in the UK of a drug to help fight the virus. Another entrepreneurial Life Sciences company, Novacyt, saw its share price skyrocket after the US Food and Drug Administration (FDA) issued an Emergency Use Authorization (EUA) for its COVID-19 test. Despite such exceptions, the quarter will be remembered for an intense sell-off as the resilience of companies in all sectors was scrutinised by investors. Economic growth for the UK in the first two months of the year was tepid. The Consumer Prices Index (CPI) rate increased to +1.8% in January, up from +1.3% in December 2019, before dropping slightly to +1.7% in February 2020. ONS data also revealed that GDP grew +0.1% in January, but fell an equal -0.1% in February. More encouragingly, the manufacturing component of the UK economy grew more strongly during the first two months of the year than in December 2019. Inspecs, an eyewear manufacturer based out of Bristol, embarked on an IPO in February raising £23.5 million in the process. March witnessed a rising number of COVID-19 cases in the UK prompting Government action. On the 24th of March, the UK Government announced a nationwide lockdown, relying on newly introduced legislation to restrict people’s movements and closing non-essential physical retail outlets alongside restaurants, bars, cafes, theatres and cinemas. Despite the COVID-19 pressure felt in March, there entered a new player onto the AIM market, FRP Advisory Group. The group raised £80 million at listing. The company offers a suite of corporate advisory services, including debt advisory, restructuring and forensic accounting. In the face of choppy trading conditions, the firm is positioned to offer its advisory services at a time when the business community is seeking help to introduce timely mitigation strategies. Despite the seismic economic shocks faced in Q1, hope remained among many that swift Government intervention would help shield the UK economy from the worst effects of COVID-19. In the annual Budget announcement on the 11th of March, a new Chancellor of the Exchequer – Rishi Sunak - revealed a £30 billion stimulus package designed to help the UK economy weather the effects of COVID-19. This was quickly supported by a slew of other announcements through March, including schemes for business loans and wage support. The Coronavirus Business Interruption Scheme (CBILS), devised to alleviate credit pressure on small businesses, was welcomed by the business community. However, the approval speed of loans has been called into question. This was followed up by a scheme for larger businesses (CLBILS). Firms under this new scheme with an annual turnover of over £45 million will be able to apply for up to £25 million of finance while companies turning over annually more than £250 million can apply for up to £50 million of finance. In combination with this fiscal action, the Bank of England took aggressive monetary measures, reducing interest rates from 0.75% to 0.1%. However, from the relatively low starting point of 0.75%, the impact of such moves could be limited. The estimated fiscal stimulus brought into play by the end of March totalled 3% of total GDP. Compare this to the financial turmoil of 2008, when UK Government stimulus packages came in at around 2% of GDP. As a consequence of the depth of that commitment, all hope that the aggressive fiscal and monetary measures taken during Q1 will ultimately help to protect businesses and jobs and hasten UK economic recovery in quarters to come. What is certain is that companies listed on the AIM market will play a vital role in that recovery.
BDO AIM SECTORWATCH
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Leisure and hospitality struggled during Q1 2020, ending -18.24% down. The British Leisure and Hospitality sector was already facing some long term challenges with the end of the free movement of EU nationals scheduled for 1 January 2021. The sector relies quite heavily on EU workers to fill key roles within its labour force and the UK Government’s proposed immigration system, which includes visa fees, sponsorship licences, minimum salaries and minimum skill thresholds, will add future obstacles. In terms of consumer behaviour, the sector was primed to benefit from a strong appetite for experiences over things. For example, research from Barclays finds that over half of UK consumers would prefer to spend money on an enjoyable experience over a material possession. Current limitations aside, this demand should remain, at least in part, amongst younger demographics. In Q1 2020 the quiet month of January was followed by an international COVID-19 outbreak in February that reached pandemic proportions in early March. In mid-March, the UK Government issued guidance stating that people should avoid social venues such as “pubs, clubs and theatres”. This was swiftly followed by forced closure of such venues. The first couple of months of any new year are traditionally quieter for the hospitality sector as social calendars become sparse after the festive season. The charity, Alcohol Change UK, reported record numbers of participants signing up for its Dry January challenge in 2020, with many more millions undertaking the challenge outside of this. An AIM constituent that felt the full force of COVID-19 and Dry January was the City Pub Group. City Pub Group, which operates 47 venues across London and the southern half of England and Wales, saw its share price fall -68% through the first quarter of the year. The group’s trading was positive for the first 11 weeks up to 15 March, with turnover up +11% against the same period last year. However, the positive start to the year was negated as soon as lockdown measures came into effect. Perhaps helped by its strong performance prior to the epidemic, the City Pub Group was able to raise £22 million to shore up its balance sheet at the end of the quarter helping to boost its share price. Companies less reliant on physical infrastructure have proven more resilient to the strong headwinds and unforeseen complications experienced during Q1. In January Best of the Best (BOTB), a company that organises weekly competitions to win cars and other lifestyle prizes, reported a profit increase (before tax) of +27.8% for 2019. Historically, the company operated primarily through airports and retail sites. But at the start of 2020, the company announced it had completed its transition to being a wholly online business with competitions, pricing and marketing strategies tailored to an online audience. Social distancing policies introduced in Q1 meant that an online offering was the only appropriate avenue for business later in the quarter. Novel strategies, such as the one taken by BOTB, will prove vital in helping the Leisure and Hospitality sector navigate a tricky road ahead.
Leisure and Hospitality
Technology and Media shares avoided the worst of the damage taken during the first quarter of 2020, however the sector still suffered a decline of -21.44%. Traditional print media outlets in the UK struggled as circulation of physical newsprint plummeted due to the COVID-19 outbreak in the UK in early March. Such outlets became increasingly reliant on their online offering as a source of income, but faced fresh challenges in the digital arena too. Recent reports indicate that newspapers lost out on a chunk of online ad revenue due to ‘blacklisting’ software. This technology, used by advertisers, avoids placing their adverts alongside stories about COVID-19. This removed targeted advertising from many of the most accessed articles, dampening revenue for news companies. Time Out Group, a media and entertainment company, was affected by these forces during Q1. The company pivoted its offering with a specialist ‘Things to do at Home’ feature but faced an uphill battle against plummeting footfall for its ‘Time Out Market’ locations as well as delayed advertising campaigns from its clients. Time Out Groups’ share price fell -69% through the course of the first quarter. With traditional media outlets struggling, technology companies found themselves better placed to adapt to the social distancing policies introduced in Q1. Sumo Group, a UK based games developer, cited the potential upside for royalty income as people spend more time inside due to social distancing policies. Sumo stressed that the magnitude of such an upside remains unclear at this stage. Sumo’s downside exposure to the current economic climate is primarily on the supply end. The company faced reduced productivity due to working from home restrictions with employees unable to harness the computing power enjoyed in the office or communicate as easily. A reduction in output could cause delays in milestone payments, a key source of revenue when attempting to push their costly projects over the line. Sumo is relying on increased use of telephone and video conferencing in an attempt to mitigate lost productivity. Typically, new game titles are showcased at marquee events such as GDC and E3, but these have been cancelled. Game studios and publishers will have to come up with creative ways to market new content. Sumo’s unaudited results for the year 2019 indicate that revenue grew +26.6% and the release of a new game title on Apple’s new streaming service, Apple Arcade, was a positive during the Q1 2020. The share price of Sumo fluctuated throughout the quarter, falling -16% overall. The COVID-19 epidemic has disrupted workforces, leading many businesses to reflect on their efficiency and the effectiveness of key processes. This could boost the implementation of automation and business-focused AI. A technology company which sits within this space is the Blue Prism Group. This company offers a Robotic Process Automation (RPA) platform that helps companies substantially implement and scale automation. RPA is one of the fastest growing business software sectors. Blue Prism’s share price proved resilient to the economic climate in Q1, rising +1.4% over the course of the quarter as investors reacted favourably to its recurring revenue business model. Blue Prism’s teams are assisting UK public services, including the NHS, to use data and automation to deliver frontline care and other essential services.
Technology and Media
Transport & Logistics saw a significant decline of -67.66% during Q1 2020, making it the worst performing sector for the quarter under the unfolding of the difficult circumstance. The sharp fall suffered by the sector during the most recent quarter eroded impressive gains in Q4 2019 (+63.66%). The Consumer Price Index (CPI) highlighted that petrol prices fell by 2.4 pence per litre between January and February 2020 while diesel prices fell by 3.2 pence per litre over the same time period. As the economic impact of COVID-19 became more apparent, an oil price war broke out between Saudi Arabia and Russia on the 8th of March. The Brent crude oil index fell -66% over the course of Q1 and the effects of this price war were quickly felt in the UK market, as well as across the world. If this price reduction is passed through the supply chain and reaches the pumps, it could boost margins for transport companies moving forward assuming sufficient demand. Weekly road fuel prices from the UK Government in April show petrol prices have hit their lowest level since August 2016 which indicates that the effects of this price war are already being felt. The extent of these implications will depend on the length of time low prices persist in oil markets. The rise in COVID-19 case numbers during March brought a slew of travel bans across the globe which had an immediate impact on AIM constituents operating within the airline industry. The net result of Q1 travel restrictions, was a sharp reduction in airline traffic flowing through UK airports. The UK was initially exempt from a US travel ban introduced on the 12th of March to foreign travellers from most of Europe. This protected a portion of transatlantic airline traffic as people flying from Europe to the US connected through London. However, growth in the case numbers of COVID-19 in the US meant the decision to shield the UK from this travel ban was quickly rescinded. Soon after, the EU banned all non-essential travel on the 17th of March which prompted many airlines to reduce their operations. Data from the Airports Council International - Europe (ACI EUROPE) highlights an 82% year-on-year reduction in UK airline passenger transport as of the 22nd March 2020. One company on the front line of these travel restrictions was Dart Group, which owns Jet2.com, one of the UK’s largest scheduled airlines. The company saw its share price reduce -68% over the course of the quarter. It reported strong demand for its services in the first two months of Q1. Summer 2020 bookings were tracking above its +16% summer seat capacity increase, however March brought severe travel restrictions resulting in widespread cancellations. On the 14th of March, it was reported that Jet2 planes heading toward Spain were turned around mid-air as the country went into lockdown: an event which is indicative of how fast the landscape changed in Q1 2020. The Dart Group has announced it will resume its flights and holiday programme from the middle of June, however this decision remains under constant review. To protect the company’s cash flow it announced plans for a reduced flight programme, a recruitment freeze and has deferred all non-regulatory capital expenditure. While lockdowns are impacting physical shops, there remain opportunities for companies operating in the Transport and Logistics sector to service continued demand for online goods and to participate in the provision of essential goods and services. Xpediator is a provider of freight management services and supply chain solutions. The company operates an asset light business model with low fixed overheads providing flexibility in the freight forwarding arm of its business. This gives the company the ability to adjust its services to fluctuations in demand, meaning it could quickly adapt to the shifting situation through the rest of 2020. These factors have helped Xpediator’s share price finish Q1 2020 +56%from its lowest point during the quarter, however it still remains down by a third over the quarter. Company reports from the end of March highlight that demand from Chinese customers was starting to improve as the country began to emerge from two months of lockdown.
The retail sector of the AIM market dropped -51.55% through Q1 as UK retailers continued to grapple with disruption and store closures. The Centre for Retail Research reports that in the year to the 5th of April, 16 companies had already failed impacting 718 stores and potentially 28,883 employees. BDO’s High Street Sales Tracker (HSST) highlighted that total like-for-like (LFL) sales in January benefited from extended New Year discounting: total LFLs were up +7.0% from a base of +3.8% for January 2019. In early March the imminent threat of COVID-19 became more apparent. Springboard data also revealed that footfall dipped dramatically during this period as consumers simultaneously shifted spending away from discretionary and toward essential items. Pressure on Retail increased substantially on the 23rd of March when the Prime Minister ordered all non-essential stores to shutter making it difficult for retailers without a well-developed online presence to service remaining demand. For specialist retailers such as Safestyle UK, a supplier of PVC windows and doors, that rely on household visits as an essential part of their service, social distancing raised immediate difficulties around access and workforce management. Activities including installation and conducting surveys were no longer feasible following government guidance on COVID-19. Safestyle’s share price fell -72% through the first quarter of 2020 as investors balked in the face of the ensuing uncertainty. With a combination of prudent cost saving measures and Government support, Safestyle’s board believes it is resilient and can withstand the impact of a closure beyond the end of June 2020. Quiz Clothing, a fashion retailer operating concessions, individual stores and an online presence, also saw its share price fall -72% over the course of Q1 2020, making it one of the worst performing stocks in the Retail sector. The company was one of relatively few non-essential retailers that announced the closure of its online store – in addition to the required shuttering of physical outlets – in order to protect staff working in its distribution centres. However, lockdown-related issues proved only part of the battle faced by Quiz this quarter. The group had already recorded a -9.3% reduction in revenues for the 7-week period at the end of 2019. For retailers with an important concession element, the struggles of some high profile department stores will have provided further stress through closures and delayed payments. Encouragingly, BDO’s HSST shows continued growth of 13.7% in non-store spending during March 2020 from the year before. Although this was a lower growth than that recorded for March 2019 (+18.7%), it indicates that some demand remained for non-essential items over a difficult period for consumer and retailers alike. Major online fashion outlets, ASOS and Boohoo, should be relatively well-placed to fill some of the supply vacuum left by the closure of physical retail outlets. However, both companies weathered storms during Q1 with large reductions in their respective share prices. ASOS announced that sales dropped 20%-25% in the three weeks of trading up to the 7th of April. In January, Boohoo reported net cash of £245 million which should help it during these turbulent times. An online retail specialist which fared better was Naked Wines. This AIM constituent, offering wine delivery, saw its share price rise +10% through Q1. Naked Wines had to extend delivery hours to accommodate increased demand for its products, partly due to the closure of the nation’s pubs and bars. Naked expects its 2020 revenues for the financial year ending March 2020 to be in excess of £200 million. The performance by Naked Wines during this period highlights that, given the right strategy and appropriate product mix, some companies will prove resilient to the economic shocks that look set to rock the Retail sector for quarters to come.
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