COVID-19 ... This approach entails i) assessing the current business plan, ii) estimating the current

  • View
    0

  • Download
    0

Embed Size (px)

Text of COVID-19 ... This approach entails i) assessing the current business plan, ii) estimating the...

  • COVID-19

    Anticipated recovery and financial forecasting June 2020

  • 1. Introduction

    COVID-19 – Anticipated recovery and financial forecasting1

  • © 2020 Deloitte The Netherlands

    Contents

    2COVID-19 – Anticipated recovery and financial forecasting

    1. Introduction 2

    2. Impact on equity markets, macroeconomy and fiscal policy 6

    3. Economy recovery scenarios 11

    4. Financial forecasting and business valuation under COVID-19 circumstances 17

    5. Appendix 24

    1

    2

    3

    4

    5

  • © 2020 Deloitte The Netherlands

    Purpose

    Primarily a health crisis, COVID-19 is affecting millions of people worldwide. The necessary measures to keep the outbreak of the virus as controlled as possible also have a major impact on public life

    Introduction

    3

    Introduction

    Structure

    • On 11 March 2020 the COVID-19 outbreak was declared a pandemic by the World Health Organization (“WHO”). As we have seen in the news in the last couple weeks, the COVID-19 crisis has a severe impact on our health, the way we live, the economy and may continue to have so over the next couple of years.

    • We start with an overview of the COVID-19 outbreak and the measures taken by governments world wide, without being complete. Next we give an overview of the expected economic impact of the COVID-19 crisis and the envisaged economic recovery scenarios. We conclude this publication with considerations how to construct a financial forecast and properly take into account risk factors.

    • Following the outbreak of COVID-19 stock markets declined. Although, as per end of May 2020 a recovery is observed, volatility in stock markets is still high. We have seen a large shift in analyst forecasts compared to the so called pre- COVID-19 period. However, there is a lot of uncertainty about the potential recovery scenarios.

    • The purpose of this publication is to give an overview of the different recovery scenarios presented by economists and the resulting expected impact on business valuations. The timing and shape of the recovery will be determined by several factors, including: (1) the course of the pandemic and effectiveness of efforts to contain it; 2) the depth of the initial decline in economic activity; and (3) the magnitude, timing, and effectiveness of macro policy responses. In addition, we will provide considerations how to set up a financial forecast to perform a business valuation in times of uncertainty.

    Key takeaways

    • Market consensus by leading economists is that the major economic regions are predicted to exhibit a V-Shaped economic impact resulting from COVID-19, showing a strong economic slowdown in 2020 followed by a relatively steep recovery in 2021. Within Europe, southern European countries are expected to experience the biggest decline in GDP in 2020, while in 2021 these countries are anticipated to have the highest recovery rates.

    • Analysts predict lower revenues across all sectors for the upcoming years relative to pre-COVID-19 predictions, with the Energy sector showing the highest decrease, followed by real estate and financial services. Healthcare is the least affected sector.

    • Given the uncertainties, financial forecasting under current circumstances is very challenging. Therefore, business management and valuation specialists should form a view on how to consider the COVID-19 circumstances when composing a financial forecast for a business plan and/or business valuation analysis.

    • A four-stepped approach to Discounted Cash Flow (DCF) business valuations under COVID-19 in terms of financial forecasting may facilitate this process. This approach entails i) assessing the current business plan, ii) estimating the current year (2020) impact of COVID-19 and formulating a recovery plan, iii) developing scenarios based on revenue recoverability, and iv) taking into account an appropriate discount rate.

    COVID-19 – Anticipated recovery and financial forecasting

  • © 2020 Deloitte The Netherlands

    While the COVID-19 outbreak originated in China, currently the majority of COVID-19 cases have been registered in Europe and the United States

    Introduction

    4

    0

    20.000

    40.000

    60.000

    80.000

    100.000

    120.000

    140.000

    13.02.202031.12.2019 15.01.2020 30.01.2020 29.02.2020 15.03.2020 30.03.2020 14.04.2020 29.04.2020 14.05.2020 01.06.2020

    AMERAPAC EMEA

    31 December

    The Municipal Health Commission of Wuhan

    (China) reported to the World Health Organization a cluster of unknown pneumonia

    cases in the city of Wuhan, in the Chinese province of Hubei

    30 January

    The World Health Organization

    declared the outbreak of COVID-19 in China an International Public

    Health Emergency

    N u m

    b e r

    o f d a il y c

    a s e s

    2 April

    The world

    passes 1 mln COVID-19

    infections

    15 March

    The Dutch government

    imposed restrictive measures 15 April

    Total global

    number of infections passes 2

    mln

    20 April

    Denmark lifts

    lockdown measures

    Source: World Health Organization, Deloitte analysis as per 01-06-2020

    Timeline COVID-19 cases

    COVID-19 – Anticipated recovery and financial forecasting

    1 June

    Restaurants and

    cafes are allowed to open in the

    Netherlands

    7 April

    42 states in USA

    issued a stay at home order

    9 March

    Italy imposed a

    national quarantine

    11 March

    The World Health Organization

    declared COVID-19 outbreak a pandemic

    14 March

    Spain imposed a

    full lockdown

    23 March

    UK imposed a 3

    week lockdown

    10 April

    The global death toll

    surpasses 100 K

    11 May

    Netherlands ease

    lockdown measures

    11 February

    The World Health Organization

    announces that the new coronavirus disease will be called

    COVID-19

    13 January

    Officials in Thailand

    confirms the first case outside of China

    23 January

    China imposed a lockdown in

    Wuhan and other cities in Hubei.

  • 2. Impact on equity markets, macroeconomy and fiscal policy

    COVID-19 – Anticipated recovery and financial forecasting5

  • © 2020 Deloitte The Netherlands

    0

    10

    20

    30

    40

    50

    60

    70

    80

    90

    100

    0

    1,500

    1,000

    2,000

    2,500

    2017 20202002 20092003 20192007

    2,235

    20142008 2010 2011 2012

    836

    2013 2015 2016 2018200520042001 2006

    -63%

    Impact on equity markets, macroeconomy and fiscal policy

    6

    0%

    4%

    8%

    12%

    16%

    20%

    05/2001/20

    16.1%

    1.6%

    7.5%

    MSCI Europe

    VIX

    Impact COVID-19 on MSCI Europe and VIX

    volatility index (EUR)

    Impact COVID-19 on EUR bond

    yields - All Corporates* 10 years

    0

    20

    40

    60

    80

    100

    0

    2,000

    1,500

    2,500

    01/20

    1,792

    1,153

    05/20

    MSCI World

    VIX

    Relatively steady index

    Steep decline of -/- 35.7%

    Partial recovery of 28.1%

    COVID-19 – Anticipated recovery and financial forecasting

    Source: Capital IQ, Deloitte Analysis

    10 Yr B

    10 Yr BBB

    * Yield on composite bond index including EUR based corporate bonds derived by Capital IQ

    • There is substantial uncertainty on the economic outcome following the COVID-19 outbreak.

    • This has led equity market volatility – reflected in the VIX index – to spike to levels not experienced since the global financial crisis, particularly in March 2020.

    • Although stock markets have partially recovered recently from their lows, the MSCI Europe Index has lost 17.2% between 1 January 2020 and 31 May 2020.

    • Corporate bond yields have increased, particularly on the lower rated debt. This signals deteriorating liquidity and increased credit risk perceived by investors.

    • Similar to the stock markets, bond markets have partly recovered.

    MSCI Europe and CBOE Volatility S&P 500 Index (VIX) (EUR)

    Equity markets have declined sharply. We do observe a first sign of recovery, however volatility, driven by the uncertainty of the duration of the crisis, is relatively high

  • © 2020 Deloitte The Netherlands

    − Sectors like Health Care and Information Technology have performed relatively well, as these segments are less exposed to a near term contraction in consumer spending due to COVID-19.

    − The AEX index has experienced a decrease of 11.9%, slightly better than the MSCI Europe.

    − The Real Estate sector experienced a - 35.0% value loss, presumably resulting from the expectation that many commercial customers will not be able to pay their full rent.

    − Financial institutions have also experienced a large decrease in share prices (-29.8%), primarily due to concerns about increased credit losses.

    • We analysed the market cap development of the companies included in the MSCI Europe Index between 31 D