Start All Over Again!

Start All Over Again!                                                                                     01 May 2020

The best scenario for the emirate’s tourist sector is that its doors may open by July but there could be a further two-month delay, depending on global restrictions. Tourist visas have been on hold since 17 March but with tourism contributing US$ 40.9 billion to Dubai’s GDP, and attracting 16.7 million annual visitors, it is essential that it gets off to a flying start as soon as authorities deem it fit.

DEWA has signed a 25-year old agreement with Acwa Power to build the fifth phase of the Mohammed bin Rashid Al Maktoum solar park which will see a further 900 megawatts added to the emirate’s solar energy capacity. When the project is completed, it is expected to generate 5k MW of electricity and result in solar energy providing 25% of Dubai’s total energy requirements by 2030. The US$ 0.0169 bid submitted by the Saudi Arabian company was the lowest received from sixty other global companies.

Having been placed into compulsory administration earlier in the month, the country’s largest health care provider, NMC, has requested the delisting of its shares from the London Stock Exchange. Its visible problems started in December when US short seller, Muddy Waters, pointed to anomalies in its financial reporting, followed two months later by a trading suspension of its shares on the London bourse. The knock-on effect of these irregularities is that several local banks are owed in excess of US$ 2.7 billion, with ADCB being the largest creditor with US$ 980 million of that total. As NMC have reported liabilities of US$ 6.6 billion, it is possible that the banks may be looking at impairment losses of up to 50%. Meanwhile, the founder and major shareholder, BR Shetty, maintains his innocence from India, blaming the fraud on “a small group of current and former executives at these companies”; he also claimed that bank accounts were created in his name and transactions were made without his knowledge.

Bayut has secured a new round of funding of US$ 150 million which values its parent company, Emerging Markets Property Group, at US$ 1 billion. The deal, led by Dutch-based OLX Group, (with a 39% stake) will result in the Dubai HQ being combined with operations in the Middle East, North Africa and South Asia, with expansion plans to serve one billion global customers. The five-year old Dubai-based company also has other property portals – Zameen (Pakistan), Bproperty (Bangladesh), Mubawab in North Africa and Thailand’s Kaidee. Its new partner, a subsidiary of Naspers which owns Dubizzle, will combine its own operations in Egypt, Lebanon, Pakistan and the UAE.

DP World reported a 1.7% decline in Q1 shipping container volumes to 17.2 million 20’ equivalent units, with a bigger decline, that could be as high as 10%, expected this quarter for obvious reasons. The Dubai-based ports and logistics conglomerate saw a 3.4% drop to 3.4 million TEUs at its Jebel Ali facility, because of a decline in lower-margin cargo, although this was 0.3% higher on a like to like basis.

DIB posted an 18.5% decline in Q1 net profit to US$ 300 million, as the bank took a conservative approach with additional provisions and impairments, totalling US$ 409 million, in realistic expectations of the negative impact of Covid-19 on its business. The country’s largest Islamic bank posted an expansion in total assets, year on year, by 19.0% to US$ 75.2 billion, with financing and sukuk investments 17.0% higher at US$ 58.8 billion. The bank also approved the foreign ownership limit be increased to 40% from 25%.

The bourse opened on Sunday 26 April and, 164 points higher (9.5%) over the previous three weeks, jumped 136 points (7.2%) to close on 2,027 by 30 April. Emaar Properties, having gained US$ 0.08 over the previous three weeks, climbed US$ 0.07 toUS$ 0.74, whilst Arabtec, US$ 0.04 higher the previous three weeks, was up US$ 0.03 to US$ 0.19. Thursday 30 April saw the market trading at 317 million shares, worth US$ 78 million, (compared to 318 million shares, at a value of US$ 87 million, on 23 April).  In April, the bourse opened on 1,771, (having lost 31.6% in value the previous month) and gained 256 points (22.7%) to close the month on 2,027. Emaar started the month at US$ 0.59 and gained US$ 0.15 to close at the end of April on US$ 0.74, with Arabtec also up US$ 0.06 to close on 31 March at US$ 0.19.

By Thursday, 30 April, Brent, down US$ 9.01 (28.6%) the previous fortnight, regained US$ 4.01 (17.8%), to close at US$ 26.48. Gold, up the previous week by US$ 28 (1.6%), gave up that gain, and more, losing US$ 51 (2.9%) on the week to close on Thursday 30 April, at US$ 1,694.  For the month of April, Brent nudged marginally higher (US$ 0.11) from its April opening of US$ 26.35 to close the month on US$ 26.48, whilst gold was US$ 98 (6.1%) higher from its month opening of US$ 1,596 to close on US$ 1,694.

Bitcoin continues to titillate the market with its volatility.  Early morning trading on 30 April saw the cryptocurrency gaining US$ 1,706, in just two days, to US$ 9,478 but by the end of Thursday’s trading, it was worth US$ 8,742 – 74.0% higher than its 16 March’s US$ 5,024 but 7.8% lower than its early morning high; this was put down to dismal US unemployment numbers.

Although BP saw profits, (referred to as underlying replacement cost profit), slide US$ 1.6 billion (66.5%) to US$ 800 million, the oil giant – unlike some of its peers- will continue to pay dividends, whilst warning that it was facing an “exceptional level of uncertainty”.  Following the onset of Covid-19, and the introduction of lockdowns, demand for oil has slumped, causing prices to twenty-year lows.  Whilst most of the world’s planes remain grounded and more people work from home, reducing fuel demand, the outlook for oil remains dim.

Shell’s Q1 adjusted net income was ahead of market expectations but 46.0% lower at US$ 2.9 billion, as the Anglo-Dutch conglomerate, having announced earlier in the year that it had slowed down its US$ 25 billion share buyback, cancelled the next tranche of purchases due to current economic conditions. It also surprised the market by cutting its dividend, by 67% to US$ 0.16, for the first time since World War II and it does appear that the traditional US$ 15 billion dividend may become history. Other global players have also gone the same way – with Exxon Mobil freezing its dividend for the first time since 2007 and Norway’s Equinor ASA going even further by cutting its pay-out.

Despite i-Phone sales declining in China, as well as supply problems there, Apple saw a marginal 0.5% Q1 revenue growth to US$ 58.3 billion, driven by increased demand for its streaming services and “phenomenal” growth in the online store, due to the coronavirus lockdown. iPhone sales declined 7.2% to US$ 28.9 billion but this loss was offset by growth in two sectors – like for like services, including Apple Music and Apple TV, 16.6% higher at US$ 13.3 billion and wearables, home, accessories up 22.5% to US$ 6.3 billion.

Covid-19 has seen Twitter’s advertising business badly hit, as revenue, from the 11th, was 27% lower, whilst Q1 sales came in 3.0% higher at US$ 808 million; it now boasts 166 million daily users – a 9.2% annual increase. However, it did post its first ever quarterly loss in over two years, with a US$ 8 million loss.

HSBC’s Q1 profit sank 48.0% to US$ 3.2 billion and, at the same time, warned of an inevitable future decline, as it set aside US$ 3.0 billion for bad debts, which may top US$ 11 billion by year-end. Revenue lost 5.0%, to US$ 13.7 billion, some of which was attributable to adverse valuation adjustments. Europe’s largest bank was not the only financial institutions in trouble as, over on the other side of the Atlantic,  JPMorgan Chase posted  a 69% decline in Q1 profit, as it set aside $8.3bn for loan loss provisions, whilst the other three major lenders, Bank of America, Wells Fargo and Citigroup, reported their highest provisions in decades, (as non- performing debt continues to rise across the board).

In Australia, NAB reported a 51% decline in H1 profit to US$ 845 million, as it seeks an extra funding of US$ 2.3 billion from shareholders to shore up dwindling reserves in the midst of Covid-19. At the same time, it announced that its dividend will be more than halved to US$ 0.194. US$ 775 million was set aside for potential future losses and a further US$ 650 million for a change in the way the bank accounts for the cost of its software.

To the surprise of nobody, ME carriers reported a 14.1% slide in cargo, as capacity dipped by more than 20.0% – globally the figures were down 15.2% and 22.7% respectively. IATA also posted figures of ME cargo in and out of Europe, noting declines in excess of 30% and 20%. The problem facing the sector seems to be that there is not ready capacity to meet the demand, not assisted by bureaucracy that is often too slow to approve special chartered cargo flights.

In March, global passenger demand fell off the cliff, mainly caused by the pandemic and government enforced restrictions, with IATA reporting that March passenger demand had slumped 53%, year on year; there was a 36.2% decline in monthly passenger capacity as load factors declined 21.4% to 60.6%. Undoubtedly, April and ensuing months will report even worse results as global travel and tourism grinds to an almost complete standstill.

It seems likely that Renault SA will be the beneficiary of a US$ 5.4 billion aid package from the French government to help it through the coronavirus impact that has seen a 19% fall in Q1 revenue, as unit sales declined by more than 33%; over the quarter, it saw its liquidity down US$ 6.1 billion to US$ 11.5 billion by 31 March. The French automaker was already in financial trouble before the advent of the pandemic, as sales in most of its markets were heading south. In addition, its key partner, Nissan, was also struggling, not helped by the instability since the late 2018 arrest of former leader Carlos Ghosn.

An even bigger bailout, involving the Macron administration, was the one for Air France-KLM, in another industry that has been smashed by the effect of Covid-19, with most routes closed, passenger demand decimated and fast running out of cash. The airline is set to receive funding of US$ 7.7 billion from the French government and up to US$ 4.4 billion from Dutch coffers. Last year, its passenger traffic exceeded 100 million to 312 different destinations; its 550-plane fleet is as good as grounded.

Last week, he saw Virgin Australia go into administration, now Richard Branson is in funding talks with the UK government, (for a reported `US$ 500 million), and private investors, as well as seeking a buyer for Virgin Atlantic, of which he is a 51% shareholder; Delta owns the remaining 49%. He has even offered his luxury island resort Necker as collateral. In March, the Chancellor, Rishi Sunak, warned both airlines and airports that the Johnson government would only step in as “a last resort”.

In line with other major airlines, IAG, which includes BA, Aer Lingus and Iberia in its portfolio, is facing financial Armageddon, with Covid-19 continuing to impose more damage on an already battered sector. As revenue streams dry up, BA has had to look at stringent cost-cutting measure which may result in 28.6% of its 42k-strong staff facing redundancy. The problem facing all airlines is to try and forecast if and when demand returns to pre-pandemic levels which could take years. Airlines such as Qantas, putting 20k staff on leave, Air Canada, (placing 15.2k employees on furlough) and Ryanair planning 3k cuts have already taken drastic measures.

On Monday, exactly fifteen years after the Airbus A380 had its first maiden flight, the anniversary was marked by the fact that only one of the planes was actually in the skies on April 27, 2020. Over the past fifteen years, 242 of the world’s largest commercial aircraft have been delivered and the final plane will be come off the assembly line next year. Meanwhile, the plane maker is to furlough 3.2k staff at its North Wales site, as the government will pay 80% of wages, with a 10% company top-up. This comes after Airbus announced that it would be cutting production by a third and warning the 135k payroll that there could be “potentially deep job cuts”, as the aviation industry will face a major contraction driven by Covid-19; already, it has resulted in global airlines facing financial ruin and plane deliveries almost completely halted. Airbus reported a Q1 49.0% plunge in an adjusted, year on year, EBITDA to US$ 300 million, as revenue dipped 15.0% to US$ 11.7 billion, with a quarterly loss of US$ 525 million, compared to a US$ 44 million profit in Q1 2019.  It also posted a negative US$ 8.8 billion cash flow, not helped by a US$ 4.0 billion penalty to settle bribery investigations in Britain, France and the US. There is worse to come.

Covid-19 is not the only reason why Boeing is struggling, as its 737 Max planes are still grounded more than a year after its second fatal crash in Ethiopia. This, along with a collapse in air travel, has resulted in plans for the plane maker to ditch 10% of its 150k workforce. Chief executive Dave Calhoun warned that “the aviation industry will take years to return to the levels of traffic we saw just a few months ago.”

After years of negotiations – and so close to sealing a deal – it seems that Covid-19 has put the brakes on a proposed US$ 4.2 billion deal between Boeing and Embraer SA’s commercial-aircraft business; this figure was about four times more than the Brazilian plane maker’s total market cap but would have given Boeing a boost in the smaller jetliner market. If it had gone ahead, it would have competed with the new Airbus smaller single-aisle planes which are set to become even more popular as the industry adjusts to a “new reality” as travel demand almost dissipates on the back of the pandemic and any recovery will be slow. Embraer, which is the third largest plane maker in the world, has also agreed with Boeing to ditch a second venture to sell Embraer’s C-390 Millennium military cargo aircraft.

This is but one major deal that has hit the buffers because of the pandemic. Three other high profile “casualties” include Stein Mart and Kingswood calling off their merger earlier in April, citing unpredictable economic conditions. Sycamore Partners is pulling out of a deal to purchase a majority stake in Victoria’s Secret, whilst Softbank has withdrawn its US$ 3 billion stock purchase in We Co, with the case now going to court.

Official figures indicate that the US economy contracted by 4.8% in Q1, its first contraction since 2014, attributable to the onset of Covid-19. Since the lockdown only came into force mid-March, the omens are dire for Q2 data, and Donald Trump’s re-election chances, with the possibility of the economy slumping by as much as minus 25%. Over the past five weeks, Washington has implemented over US$ 3 trillion in emergency spending, including ‘helicopter’ payments to many families. Fed Reserve Chair, Jerome Powell, has reiterated that the agency would maintain rates at almost zero until it “has weathered recent events and is on track” and, that this is “not the time” to worry about the US debt burden. Since mid-March, more than 30 million people have filed for unemployment, (including 3.8 million this week), thus erasing all the job gains made over the past eight years. Consumer spending, accounting for almost 67% of the domestic economy, was off 7.6% in Q1, whilst spending on food services and accommodation dropped by more than 70%. The eurozone is also facing major economic contractions, with Q1 records showing the impact of Covid-19, even for only part of March, has had – and will continue to have; the bloc’s economy declined by as much as 3.8% in Q1 and this could rise to negative 15% by the end of June. The figures for three major economies were even worse, with contractions of 5.8%, 5.5% and 4.7% recorded in France, Spain and Italy respectively. Germany has yet to post Q1 data but it did post a 337k rise in unemployment numbers this month which would have been worse if the Merkel government had not introduced Kurzarbeit, a financial package that helps people put onto shorter working hours. The ECB cut the cost of funding for banks and introduced measures to inject more liquidity into the economy, whilst awaiting further fiscal measures from the EU politicians, with Christine Lagarde confirming that “an ambitious and coordinated fiscal stance is critical, in view of the sharp contraction.” The EU President also stated that the central bank is “fully prepared” to increase or extend this US$ 800 billion+ programme, if needed. Europe is still not united when it comes to the terms of the agreement with the likes of Germany and the Netherlands in disagreement with France and Spain whether the aid should be grant or loan driven. It looks as if we all may have to Start All Over Again!

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