WH Smith seeks cash injection and engineers look to rise to the coronavirus challenge

“Stocks in the UK, Europe and Asia rallied on Monday as investors became more optimistic about life getting back to normal later this year. Signs that coronavirus may be peaking in parts of mainland Europe have given some hope that the economic hit will be short-lived,” says Russ Mould, Investment Director at AJ Bell.

“The FTSE 100 advanced 2.3% to 5,540, Germany’s DAX index jumped 4%, while Japan’s Nikkei 225 surged by 4.2%.

“A strong showing in the equities market wasn’t clouded by oil prices pulling back as tensions remained high between Russia and Saudi Arabia regarding their price war. Brent Crude fell 1.3% to $33.67 per barrel.

“The oil price weakness failed to drag down shares in Royal Dutch Shell and BP, both of whom saw their shares rise at the start of the new week. Investors hungry for income in a low rate world are increasingly being attracted to Shell, in particular, because it has shown no signs of cutting its dividend. In comparison, more than a fifth of the FTSE 100 have suspended payouts in recent weeks.

“Elsewhere among UK corporates, retailer WH Smith said it would issue new shares to raise a slug of cash as a condition of getting a new £120 million lending facility. Its business has been hit hard by a significant drop in customers visiting its shops due to lockdown measures.

“Raising extra cash is becoming increasing popular with companies as way to shore up their balance sheets and given them a better chance of navigating through the crisis. It’s unfortunate that existing shareholders will be diluted by such fundraising, but that’s the price to pay to ensure the business can survive.”

Smiths Group / Rolls-Royce

“Updates from two of the UK’s big engineering firms, Smiths Group and Rolls-Royce, followed two of the key themes of the coronavirus crisis in the business world.

“Companies aiming to be good corporate citizens while highlighting the ability of their finances to withstand the current disruption.

“First-half results from Smiths Group already feel like an irrelevance given they cover a period up until the end of January when many of us would still have been familiarising ourselves with the emerging virus in China.

“More relevant are the comments on the beginning of the current financial year, where an initially mild impact is worsening by the day.

“By contrast Smiths Medical – the Smiths Group conglomerate’s one-time problem child – has enjoyed a strong start to the year. The decision to delay the demerger of this business demonstrated a commitment to meeting the needs of the nation for the supply of ventilators and other critical care facilities.

“Rolls-Royce is a member of a consortium, alongside Smiths, focused on increasing the UK’s supply of ventilators and is working in areas like data analytics and education to help get us through the current maelstrom.

“It joins the seemingly endless list of companies to suspend their dividend, while unsurprisingly announcing plans to cut salaries and withdrawing its guidance.

“The big challenge for Rolls-Royce is addressing its reliance on maintenance and repair revenue from its installed base of aircraft engines.

“If planes are being flown less, demand for these services will reduce dramatically and it remains to be seen what the long-term impact of coronavirus will be on the aviation industry.

“Significantly both Rolls and Smiths outline that their borrowing facilities do not have stringent covenants with Smiths noting none of its debt is due to mature until 2022.

“The UK is fortunate to be home to some excellent engineers. Lean, technologically-focused companies have replaced the less sophisticated metal bashers which constituted the space in the 1990s.

“And it is reassuring to have at least some of this expertise directed towards meeting the massive challenges associated with the coronavirus outbreak.”

These articles are for information purposes only and are not a personal recommendation or advice.

The daily market update is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the movement in the main index, winners and losers on the day and any macro-economic announcements.