DealMakers - Q2 2020
COVID-19 – The good, the bad and the possibility to bounce back
by Ryan Ellison
The ancillary effects of COVID-19, as a consequence of the measures implemented through enforced social distancing and a country wide lockdown – not just locally, but across the globe – may indeed be felt for years to come, and may, in certain instances, become institutionalised within our very social fabric and the way in which we engage and transact with each other.
It accordingly stands to reason that while COVID-19 will be a massive destructor of current economic value and social structures in the interim, it will undoubtedly create opportunities through necessity and the ability to bounce back. History has always sought to teach us that where great change occurs, there will always be clear winners, clear losers and the in-between, who, if they adapt, may in time fall on the right side of history.
Through our market analysis, and from a global perspective, the sectors within various economies currently most at risk in the short to medium term include (but are not limited to):
Social gathering platforms including restaurants, bars, and brick and mortar retail, to name just a few, as a consequence of public gathering restrictions, fear of infection and reduced discretionary spending in the face of uncertain times;
Aviation, tourism and hospitality-related industries, as a consequence of current and extended government-imposed travel restrictions, general travel slowdown and similar reasons noted above;
Automotive-related industry decline as a consequence of pre-existing trade tensions and declining sales and now, as a consequence of COVID-19, further reduced output in China and Europe (being the first and second largest automotive producers in the world);
Oil and gas industries, as a consequence of uncertainty and reduced manufacturing activities; and
The logistics market, comprising various nodes such as transportation, inventory management, warehousing, order processing and other supply chain activities. It is already a highly complex market and consequently expected to take an extended period of time (post COVID-19) to turn around and recover losses. Once unutilised capacities are lost, they cannot be recovered and will automatically hit bottom line profitability.
The businesses operating within these sectors, as well as businesses with typically less defensible positions, thinner margins, working capital constraints and smaller cash reserves to defend against downturns, will be those most affected as a consequence of COVID-19 and its ancillary effects.
Conversely, through our market analysis, sectors expected to benefit in the short to medium term and, in certain instances, long term include (but are not limited to):
Medical equipment and service provider sectors, as the demand for equipment, consumables and services increases to tackle the rate of infection and treatment;
Online retailers essential to FMCG (fast-moving consumer goods) and over-the-counter (OTC) pharmaceuticals, due to increased demand as more people stay at home and stock up for emergencies and uncertainty;
E-learning platforms (as schools and universities remain closed) which will be required as a medium to educate our youth and others seeking educational improvement;
ICT and telecom-based businesses in the support of remote working, inter alia facilitating online video and audio conferencing services and secure data-rooms for the sharing of sensitive information.
While significant immediate growth has been experienced, and short to medium-term future growth is anticipated within the above benefited sectors, a natural drop-off is expected once restrictions and the COVID-19 threat eases. Some retention of users within these sectors is likely once an individual’s habits have been reformed and digitised. Notably, but without definitive linkage, is that the outbreak of the SARS virus in 2002 coincided with the rise of the likes of Alibaba and other B2B (business to business), B2C (business to consumer) and C2C (consumer to consumer) online platforms, allowing for transactors to interact without a physical presence being required.
Less resilient, at-risk companies on the wrong side of this pandemic will be required more than ever to be prudent, and to be prepared for long standing losses in operating activity. Leadership will need to consider their ability to rationalise or diversify operations and take long-term views, looking inwardly to understand what their business truly comprises to understand efficiencies and inefficiencies and the potential for the commoditisation of its intellectual property, to identify opportunities on which to leverage and to survive the global pandemic and its lasting effects.
All companies, regardless of presumed resilience will be required to:
endeavour to protect its workforce, above all else;
consider their current disaster recovery plans and insurance coverage in such events;
stress-test budgeted revenues, margins, costs, cash flows, balance sheet ratios and covenants for breach;
develop contingency plans where necessary;
preserve customer base and loyalty, and understand revised credit risk; and
understand supply chain risk and stock shortages at a minimum.
In conclusion, we as humanity are being tested on a scale not previously experienced by current generations, with extraordinary sacrifices being made by ordinary people from every corner of the world in an attempt to limit the loss of human life. Regrettably and inevitably, as with all global crises, businesses will shut down and numerous lives will be lost. However, it is only our continued collaboration, resolve, understanding, kindness, and the remarkable efforts by ordinary people which will see us brave this storm and limit the loss of life.
We at BDO wish every one of our stakeholders, and the general public, good health, safety and security in these uncertain times.
Ellison is an Associate Director, Corporate Finance, BDO in South Africa
Various news reports; World Health Organization Situation Reports
McKinsey & Company: Covid – 19: Facts and Insights; Stellar Business Consulting Pty Ltd: A guide for every business owner to Thrive, not just Survive; BCG Henderson Institute: How Will Things Be Different When It’s All Over?