Critical moves to navigate the financial impact of COVID-19
A Southeast Asia perspective
Southeast Asian markets are in the red in Q1 2020 as investors have become bearish since the onset of the COVID-19 outbreak. Hospitality, mining, shipping, construction, and oil & gas have seen some of the largest declines in market capitalisation.
The speed and effectiveness of businesses’ response to the financial impact of COVID-19 will be tested in the coming months. Businesses need to respond, refresh, and accelerate contingency planning to ensure they survive the downturn and position for growth when the recovery comes.
This report explores the market, sector, and regional financial impact of COVID-19, together with the critical and pragmatic moves that management teams can make across seven key areas:
- Downturn planning: A number of companies may now face a prolonged period of exceptionally poor trading conditions. Businesses should reforecast under three scenarios: short term downturn, market recovery, and a longer term downside case.
- Supply chain risk: Asia’s increasing role as the “world’s factory” means that any major disruption puts global supply chains at risk. Companies whose supply chains are reliant on suppliers in impacted areas are likely to experience significant disruption. Businesses should map out supply chains to identify and respond to upstream supply risks.
- Working capital: A downturn in consumer demand is leading to increasing inventories that are difficult to clear. In addition, companies are also facing challenges in collecting receivables in a timely fashion from cash-strapped customers, and difficulties in paying their own suppliers, due to short-term cash flow constraints. Businesses need to monitor and optimise working capital focusing on ‘quick win’ self-help measures to deliver rapid cash release.
- Cost base realignment: COVID-19 is causing top-line contraction in several sectors and driving earnings decline in those with highly fixed or inflexible cost structures. Several businesses finalising their Q1 2020 financial results may have to confront an early and material run rate performance gap against their FY20 plan. Businesses should assess opportunities to improve resource and spend allocation, process efficiency and systems enablement.
- Credit and funding: Some companies will be able to maintain adequate headroom making drawdowns on their revolving credit facilities. Others will find that they need to approach banks to arrange covenant waivers or limit increases. The scale and urgency of the funding requirement has taken many by surprise and the uncertainty is affecting financier appetite. Early and robust communication with financiers will be critical.
- Underperforming business units: Prior to COVID-19, many businesses were already facing the challenge of managing non-core, underperforming or loss-making business units, divisions, or subsidiaries. The demand, supply chain, and liquidity impacts of COVID-19 have heightened these issues and presented an increasing drag on broader enterprise performance and value. Businesses should accelerate decisions on whether to fix, sell or close.
- Distressed M&A opportunities: Sellers are looking to rescue or exit their underperforming or liquidity challenged businesses. Buyers are looking to pursue accelerated off market strategic value opportunities to drive future growth. We look at some of ways businesses can prepare to seize value opportunities in the coming months.