10 ★ FINANCIAL TIMES Friday6 March 2020The coronavirus epidemic has turned
traditionally defensive stocks into a
gamble. Once the safest bet amid such
an outbreak, healthcare shares have
become as volatile as the unpredictable
new virus. Risks and valuations are too
high to attract conservative investors.
Hope can be found in a different safe
haven: Asian telecom companies.
As an unprecedented number of
people stay at home, working remotely
or under travel restrictions, calls,
messaging and data usage have surged.
Last year, telecoms looked a gamble
as they splurged billions on next
generation mobile 5G networks. In
Japan,SoftBank the mobile operator,(
rather than the tech investor) and peer
KDDI ave been investing for a springh
launch. In South Korea, marketing
costs have made up most of the 5G-
related expenses of companies such as
LG Uplus nda SK Telecom.
The heaviest spending has passed.
Marketing expenses are expected to
come down for South Korean telecoms,
as the number of 5G users reach the 5m
mark. SoftBank, having lowered
contract pricing, will not need such
aggressive marketing.
Shares of SK Telecom and LG Uplus
have fallen over a 10th. Both trade at 12
times forward earnings, a discount of
more than 40 per cent to peers still in
the investment part of the 5G cycle.
The sector pays fat dividends. During
times of volatility, high yields of about
5 per cent for SK and SoftBank help
soothe frayed nerves. Such payouts
should grow. 5G sign-ups will
accelerate. The higher-priced plans
should boost revenues per contract.
Economic growth will take a big
hit from coronavirus. But Asian phone
subscribers are among the safest
customers. They typically sign up for
long-term contracts. Few cancel.
The epidemic underlines the
centrality of telecoms as a vital utility.
Connectivity is essential for Asians to
carry on with life — and business —Asia telcos/coronavirus:
a great callwith a semblance of normality.
Telecoms stocks can help investors to
keep calm and carry on too.In America, football quarterbacks tend
to set up touchdowns, not score them.
Tony Romo, a quarterback-turned TV
sports commentator, has nevertheless
won a contract extension from
ViacomCBS. The broadcaster is paying
him an astounding $17m per season.
Mr Romo has an uncanny ability to
predict plays in games before they
happen. His pay approximates to what
top football players earn.
He is also worth more toBob BakishViacomCBS/streaming:
for whom the bell tollsthan venerable publisher Simon &
Schuster. The ViacomCBS chief will
meet the cost by selling assets that
include the imprint of authors such as
Ernest Hemingway and Annie Proulx.
Streaming wars are claiming some
unexpected casualties. Anything “not
video based” is up for grabs, says Mr
Bakish.
In early December, former siblings
Viacom and CBS completed their
reunification. The idea was to create a
heftier business to take on rivals such
as Netflix. The combination’s market
value was $25bn after the all-share deal
closed. At under $15bn today, that
equals what Viacom traded at before
adding CBS.
The group’s enterprise value of less
than six times forward annual ebitda
approaches 10-year lows. ViacomCBShas promised cost cuts hich will meanw
free cash flow could jump 50 per cent
this year.
ViacomCBS is still a “linear” TV
company. It depends on older viewers
who consume media in traditional
ways, and on advertising more than
subscriptions.
Such networks can still profit from
live TV. But the cost of TV talent — as
opposed to the literary kind — is
soaring. Mr Romo aside, The National
Football League is about to offer its
next broadcast rights package at
perhaps three times the old price.
HeavyweightsDisney nda Comcast
can afford pricey content. It is harder
for ViacomCBS, whose credit rating
hovers just above junk. One does not
need the predictive powers of Mr Romo
to appreciate it could all end in tears.What a difference two months make.
Coming out of fourth-quarter earnings
in January, US banks were largely
optimistic about the outlook for 2020.
For all the worries about regulations
and low interest rates, the sector was
one of the market’s top performers last
year.Morgan Stanley, Goldman Sachs
and JPMorgan Chase re among thosea
that rolled out ambitious new financial
targets. Expectations were for interest
rates to stay put in 2020.
Fast forward seven weeks and the
KBW Nasdaq Bank Index is now fast
approaching bear market territory
after slumping earlier in the week. The
Federal Reserve’s emergency 50 basis
pointsrate cut ent investors fleeing.s
Over the past two weeks, the country’s
nine largest banks by assets have
collectively seen $287bn wiped off their
market value.
Lower interest rates squeeze net
interest margin — the money that
banks make from loans after taking out
what they pay customers in interest.
Steady US economic and loan growth
helped paper over the cracks from the
Fed’s three rate cuts last year.
But with the coronavirus outbreak
disrupting everything from factory
output to retail sales and tourism, few
are betting that the economy will come
to the rescue this time around. Wells
Fargo bank analyst Mike Mayo has
slashed his earnings forecast for the
sector by 10 per cent and warned of a
potential 25 per cent decline if things
get worse.
While no banks are immune from
the falling rate environment, there are
some offsets. Expect low rates to drive
a mortgage and commercial debt
refinancing boom. Market volatility
could boost equity and fixed income
trading.
Big diversified Wall Street banks will
be best placed to reap these benefits.
The same cannot be said for their
smaller, regional peers. These are
almost entirely dependent on net
interest income. Expect the likes of
JPMorgan and Morgan Stanley to widen
their lead over peers.US banks/rates:
Fortress Wall StreetPterosaurs, reptiles from about 100m
years ago, barely looked airworthy. You
could say the same ofFlybe, a small UK
airline heading for extinction itself.
After months of talks with the
government over emergency funding,
it hascollapsed into administration.
Weighed down with a heavy cost
structure, Flybe will join the fossilised
remains of Monarch Airlines and
Thomas Cook. Coronavirus gets the
blame for Flybe’s cash shortage. But
this was always a subscale company
with a weak business plan.
The epidemic will push other weak
enterprises to the brink. They too will
demand bailouts. The government
should give them short shrift, even as it
supports business by extending tax
payment deadlines and speeding
payment on state contracts.
Flybe, extant since 1979, has a
history of lifting off from one financial
mess and landing in another. A
restructuring in 2013-14 was meant to
create a regional airline competing
against trains. Unfortunately, having
the highest share of seats from Belfast
to Manchester would never guarantee
Flybe’s survival into the next decade.
By September 2018 Flybe’s tangible
equity per share of £0.50 had hardly
changed from five years before,
according to S&P Global. Its cost per
passenger (ex-fuel) of £52.90 per flight
pretty much equalled the equivalent
revenue per customer. In contrast,
easyJet as costs just over £40 perh
flight on routes that are longer. Blame
Flybe’s fleet of 54planes.
Connect — a consortium ofVirgin
Atlantic Airways, Stobart Air nda
hedge fund Cyrus Capital — has
injected £135m to rescue Flybe. This
week, the Financial Times reported the
government had declined to stump up
a £100m loan. That will play badly
with distressed employees. It will also
trigger complaints that Boris Johnson,
the prime minister, does not really care
about the regions.
The same arguments were rehearsed
following the credit crunch. Labour
prime minister Gordon Brown dead-
batted calls for state support back then.
They came from LDV, a van company
that collapsed, and Jaguar Land Rover,
which found the money elsewhere.
Mr Johnson is right to fleeFlybe/state aid:
playing a dead batcommitment. It is not the role of
taxpayers to underwrite bad business
propositions. He has set a precedent. It
will prove useful when coronavirus
prompts other poorly adapted
organisms to seek help in staying aloft.CROSSWORD
No. 16,418 Set by BRADMAN
JOTTER PAD
ACROSS
1 Hostile European male in charge
of a learner (9)
6 Opposing editor, I start to criticise
old-style language (5)
9 Lack of inhibition of a music
group performing (7)
10 The first woman to criticise
another (7)
11 Match of supreme quality (5)
12 Illumination feeble, inadequate –
tricky situation (9)
14 Youngster for whom older woman
lacks yen (3)
15 More than one wise man on street
thinks highly of judges (11)
17 Subordinate types support stars
(11)
19 Island producing salad component
(3)
20 Vegetable from experimental
station about to be put in box (9)
22 Forbidden city, alas, terribly hard
to enter (5)
24 Annoyance of university doctor
followed by fury (7)
26 Operatic work presented by the
fellow in Herts town (3,4)
27 Leave river by rear half of boat (5)
28 Thinks that could be estimated
(9)
DOWN
1 Tree that ascends to the heavens
(5)
2 Put into a group and given
guidance about fever (7)
3 Trader terribly small-minded
when losing pounds and shillings
(9)
4 Get fired up with study, then flop
with speed (11)5 Drink making chum upset (3)
6 Dishonourable archdeacon, liar
regularly shown up (5)
7 Shortage that could help make
ground rough then? (7)
8 Stock market operators seen as
folk demanding reform (9)
13 Maiden is dreadful, having
performed topless – given wrong
advice? (11)
14 Scout sale turning out to be
unsuccessful enterprise (4,5)
16 One right to be taking break
outside, being able to get back to
normal (9)
18 Quality of safe-keeping probed by
old-style politician (7)
19 Tea party going wild on account
of “low swinger”? (7)
21 Copper’s round of duty, nabbing
second nasty person (5)
23 For Scot it’s no good being stuck
in Australia (5)
25 Your setter is upset, getting lost in
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WARM FRONT LINECOLD FRONT LINEISOBAR BRUSH FRONT SYMBOLSPRESSURE LABELS1040 10401030 1030103010201020
10201020101010101010101010101000100010001000990 990980 980970 970960 960950 950940 940xxNAMExxMalta Sun 20
Manila Fair 32
Miami Fair 27
Milan Fair 13
Montreal Cloudy -
Moscow Drizzle 11
Mumbai Fair 30
Munich Cloudy 8
Naples Shower 15
New York Shower 9
Nice Sun 15
Nicosia Shower 18
Oslo Cloudy 2
Paris Cloudy 10
Prague Cloudy 8
Reykjavik Sun 0
Riga Fair 8
Rio Fair 28
Rome Fair 15
San Francisco Cloudy 15
Singapore Thunder 32
Stockholm Fair 6
Strasbourg Rain 8
Sydney Rain 26
Tokyo Drizzle 14
Toronto Snow 2
Vancouver Sun 7
Vienna Rain 8
Warsaw Cloudy 8
Washington Shower 10
Zagreb Rain 13
Zurich Shower 7Amsterdam Rain 8
Ankara Fair 13
Athens Fair 17
Bahrain Sun 24
Barcelona Fair 16
Beijing Rain 11
Belfast Fair 8
Belgrade Shower 11
Berlin Shower 10
Brussels Rain 7
Budapest Rain 6
Cairo Fair 21
Cardiff Shower 9
Chicago Fair 3
Cologne Rain 7
Copenhagen Rain 5
Delhi Thunder 21
Doha Sun 25
Dubai Sun 27
Dublin Shower 8
Edinburgh Fair 8
Frankfurt Rain 8
Geneva Shower 9
Hamburg Rain 4
Helsinki Fair 5
Hong Kong Fair 21
Istanbul Fair 14
Lisbon Fair 15
London Fair 10
Los Angeles Sun 20
Luxembourg Rain 7
Madrid Fair 12Today’s temperaturesForecasts by
Wind speed
in KPH824 167810(^1512)
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21
Lex on the web
For notes on today’s breaking
stories go towww.ft.com/lex
Twitter: @FTLex
How about a recipe for humble pie?
Preferably delivered, with
pre-portioned ingredients, to the
doorstep. That is being served up to
the sceptics by meal-kit company
HelloFresh. As it edges towards the
black, the Berlin-based company’s
shares tripled in 2019. Now it is to be
promoted to the mid-cap MDAX
index. That pushed its value up 4 per
cent yesterday to €4.3bn.
This success will bemuse those who
think the meal kit concept is lawedf.
Why would people too busy to shop
for dinner want to spend time
cooking it from scratch? The costs of
acquiring fickle customers, through
discounts and heavy marketing, are
high. So too is the threat ofAmazon
ramping up its offer.
Sceptics can point to the travails of
Blue Apron f the US. Since a 2017 IPO,o
the shares have lost nearly all their
value. Now, worth just $36m, it is
looking at options including a sale. But
some of its woes are company-specific.
There were warehouse glitches. Its
customer count has plummeted from
more than 1m in 2017 to 351,000. It
needs more capital. It had negative
operating cash flow of $11.2m in the
fourth quarter, helping reduce the cash
balance to just $43.5m.
HelloFresh has avoided these
mis-steps. Its growing scale has helped
save costs. Marketing expenses fell by
3.4 percentage points to 22.3 per cent
of revenue in 2019. Customer numbers
are up 45 per cent on the year to nearly
3m, though it does not disclose
customer churn rates. The ebitda
margin, adjusted for share-based
compensation and the like, has been
positive for the third quarter in a row.
That margin, now 7.5 per cent, should
rise to 10 per cent by the end of 2021.
Given its efficient, capital-light
model, the shares do not look
expensive. Its enterprise value is 1.
times forward sales. Blue Apron, by
comparison, is no bargain at 0.
times.
HelloFresh can benefit from Blue
Apron’s problems. Inflated
expectations about the sector’s worth
have subsided with the hype. The
meal-kit market — estimated at $9bn
in 2025 — is probably too small to
attract much attention from big
players such as Amazon.
FT graphic Sources: Refinitiv; S&P Global
Meal kit delivery shares
Rebased, Nov
Blue Apron
Hello Fresh
Gross margin
Per cent
Blue Apron HelloFresh
Ebit margin
Per cent
-
-
-
-
Blue Apron HelloFresh
HelloFresh/Blue Apron: a race to deliver
German meal-kit group HelloFresh passed a milestone,joining the mid-cap MDAX index yesterday. Unlike
its US rival, its shares have soared and its path to profitability looks clear. The group is operationally more
efficient, with consistently higher gross margins. Operating losses at HelloFresh have also steadily shrunk.
MARCH 6 2020 Section:FrontBack Time: 3/20205/ - 19:18 User: julian.summers Page Name:1BACK, Part,Page,Edition:EUR , 10, 1