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Essentra cancels dividend as trading slows

By Josh White

Date: Friday 27 Mar 2020

LONDON (ShareCast) - (Sharecast News) - Components provider Essentra updated the market on the impact of the Covid-19 coronavirus pandemic on its business on Friday, reporting "some limited impact" on trading in the first two months of the year.
The FTSE 250 company said that was most notably in its China filters business, and to a lesser extent in the China components business.

It said that in very recent weeks, demand in China had returned back to more normalised levels.

In its components division, which the board said had some degree of exposure to industrial cyclicality, over the last week it had seen a high single digit slowdown in customer demand, particularly in Europe and the United States, as the epicentre of the outbreak shifted from Asia to those places.

The most recent indications were that it was an accelerating trend, as customers reduced activity materially.

Conversely, Asia trading was broadly in line with expectations.

In the packaging and filters divisions, Essentra said customer feedback suggested that there was not a significant risk to underlying medium to longer term demand, but rather the greater risk lay on the supply chain side and in relation to individual country temporary legislation.

However, it said it had not seen any significant impact to date.

The company explained that it was maintaining a "strong" balance sheet, and had recently completed the refinancing of an $80m USPP facility in February.

It currently had available liquidity of around ?225m, which was made of undrawn committed bank facilities of ?100m from a group of eight international blue-chip banks, along with cash on hand across the firm of ?125m.

Net debt as at 31 December was ?234m, with a ratio of net debt-to-EBITDA at just under 2x, compared to its banking covenant threshold of 3x.

The firm said it had undertaken "extensive" scenario testing, factoring in a variety of potential outcomes, which indicated that the company had sufficient liquidity to absorb an "extended period" of uncertainty.

It said it had no bank or refinancing events until October 2021, and was exploring the newly-announced Covid Corporate Financing Facility (CCFF) from the Bank of England.

Essentra said it was "working proactively" to protect its trading and cash flow position by assessing a number of mitigation levers within its control, such as the reduction of discretionary capital expenditure and net working capital across the business.

It was also implementing a reduction in discretionary spend, including a freeze on hiring and a reduction in the use of overtime and contractors, as well as a "significant" scaling back and refocusing of marketing budgets.

Government support was also being applied for globally where appropriate, to support the cost of employees, with the board saying it was actively reviewing other potential cost saving levers.

Essentra said that, notwithstanding the "generally robust" trading position and its "healthy" balance sheet, the macroeconomic environment was one of "extreme" uncertainty.

As a result, its board had decided to cancel the 2019 final dividend, and would not present the resolution at the upcoming annual general meeting.

The directors said they would continue to "closely monitor" the development of the pandemic, its impact on the company's people and businesses, and assess the dividend policy in due course.

"The company anticipates inevitable disruption to its trading in the coming months and it is too early to call out the full extent of the resulting impact on the full year financial performance," Essentra said in its statement.

"The company remains a financially sound business with a liquidity position and capital structure that is well placed to absorb an extended period of uncertainty.

"Despite the current intense focus on addressing the immediate challenges, we continue to pursue the strategic initiatives that are driving our medium to long term growth, albeit at a revised pace."

At 1014 GMT, shares in Essentra were down 6.48% at 237.73p.

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