By Ben Peters and Chris Elliott, portfolio managers of the Evenlode Global Income Fund
At the half-way point of 2020, global equity returns would suggest an entirely unremarkable period of time. We know, of course, the reality is anything but unremarkable. There has been a profound shifting of the business and economic sands underlying the period’s returns.
The driving forces in the market reflect the winners and losers in a lockdown world. The aforementioned financials, oil & gas, bricks-and-mortar retailers, certain industrial companies and others have been disrupted, while the urgent need for at-home shopping, connectivity, entertainment and healthcare has also created winners. But not all outcomes have been a zero-sum game for investors.
Many good businesses, with stable or improving competitive positions have been challenged by Covid-19. This has impacted valuations in the near-term, but in a number of cases, the long-term investment cases remain intact. Below we discuss three companies whose robust business models have ensured they can adjust to a ‘new normal’ in the post-Covid world.
CTS Eventim are the European leaders in ticketing and live entertainment. In normal times, around 250m tickets are sold using their systems each year. In the industry, different countries are dominated by a single player with typically 80-90% market share, which means CTS is able to consistently generate cash. 2020 has been challenging as social distancing measures have resulted in postponements and cancellations of events around the world. CTS Eventim were hit hard in March as the pandemic hit Europe, leading to a 35% drop in revenues in the first quarter. Most events have been moved to a later date and in May, CTS declared that they expected 85% of this summer’s events would be postponed while 15% would be cancelled. Thanks to prudent management, CTS entered the crisis with enough cash to withstand an extended period of event cancellations and a dividend suspension. A large portion of the cash position represents prepayments from consumers for tickets, and this working capital has been protected by legislation for the issuance of vouchers (rather than refunds) in their largest regions. Costs associated with cancelled events are covered in part by insurance, another reflection of financial prudence.
The short-term outlook for live entertainment is uncertain. Ticket volumes may be impacted by measures such as reduced crowd sizes, as a ‘new normal’ is established, but there are also opportunities; online ticket sales have better economics than traditional ticket booths. While the Covid-19 crisis has certainly had a significant impact, our research has left us reassured that CTS Eventim’s business is well positioned to manage the impact in the short-term, while the long-term investment case remains strong.
Medtronic is one of the largest medical technology companies, serving 72 million patients in 150 countries worldwide. Competitive advantages include high switching costs, a strong intellectual property protection and brand loyalty based on quality. Medtronic is the market leader in several categories of critical devices and continuously innovates to stay at the forefront of technology. Long-term demographic tailwinds include trends such as ageing global populations and improved access to treatment in emerging markets.
Covid-19 struck Medtronic’s operations through widespread deferrals of non-essential procedures, meaning revenue decreased -25% in the first three months of 2020, with product sales dropping over 30% and several planned product launches being delayed. However, demand surged for respiratory, airway, and like support products and the company targeted a five-times increased ventilator capacity by the end of June. Looking beyond the pandemic, opportunities include increased take-up of medical technology in emerging markets, wider corporate partnerships (such as recent work with Intel and Space-X) and technological improvements.
Siemens Healthineers is a global market leader in both medical imaging, for example CT, MRI and X-Ray scanners, and in diagnostic equipment. While both imaging and diagnostics have a clear role to play in detecting Covid-19 and managing the pandemic, the disruption to routine testing has impacted the company. Some 57% of revenues are derived from servicing, consumables and reagents sold after the initial equipment purchase, which is usually a steady source of turnover but has seen tailing demand while medical systems focus on detecting Covid-19. These revenues will return as patient need for non-Covid testing has not vanished but the exact path of a return to normality is unclear.
Nonetheless, the outlook in the long run for both these ‘aftermarket’ revenues and new equipment sales is strong, and the company has continued to roll out its Atellica high-throughput automated testing solution. Even during the pandemic, a ten-year partnership was signed with the Pennsylvania health system for lab equipment, demonstrating that customers are also seeing through the immediate pressures towards their long-term requirements.