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

COVID-19

Anticipated recovery and financial forecastingJune 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


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


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

Num

ber

of daily c

ases

2 April

The world

passes 1 mln COVID-19

infections

15 March

The Dutch government

imposed restrictive measures15 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


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


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


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


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%


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


− 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 December 2019 and 31 May 2020.

− Companies in the Energy sector have experienced the biggest value loss (a loss of -37.5%). The loss is mostly attributable to declining oil prices.

The impact of COVID-19 substantially differs per sector. We observe that companies in the Energy, Real Estate and Financials segments of the MSCI Europe index suffered the highest losses in market cap as per 31 May 2020


COVID-19 – Anticipated recovery and financial forecasting 7

-15.6%

-10.3%

-0.3%

-7.2%

-10.3%

-23.3%

-18.6%-17.8%

-29.8%

-35.0%

-37.5%

-17.2%

-11.9%

1

2

3

4

5

1

2

3

4

5

Source: Capital IQ, Deloitte Analysis

In the appendix a description of the industry classification of CapitalIQ is presented

Healthcare Consumer Staples

Information Technology

Utilities Communication Services

MaterialsIndustrials Real EstateConsumer Discretionary

Financials Energy AEXMSCI Europe

Loss in market cap (in %), MSCI Europe Index


In response to the economic impact of the COVID-19 crisis, governments are providing support in the form of loans, umbrella guarantees, and other liquidity support



• In the Netherlands, the Dutch government provides amongst others the following support to companies:

− Compensation of up to 90 percent of labour costs;

− Scaling up of the short-time working scheme;

− Income support for self-proprietorships and self-employed;

− Deferral of tax payments without penalties; and

− Financing facilities.

• The IMF has predicted that the total necessary health expenditure, and the tax and spending measures to support people and companies, will have direct fiscal costs as per April 2020 estimated at $3.3 trillion globally.

• Furthermore, at global level, loans, equity injections, and guarantees total $4.5 trillion. Packages of public-sector liquidity support, each above 10 percent of GDP in France, Germany, Italy, Japan, and the United Kingdom, were announced to support financial and non-financial firms, including small and medium-sized enterprises.

20.5

UKMexicoSouth Africa

India RussiaSaudi Arabia

Argen-tina

China Indo-nesia

NL Brazil Aus-tralia

Korea Canada

11.1

Spain

2.5

FranceUS Japan

2.1

Italy

14.6

Germany

1.1

11.0

1.5

12.5

2.4 2.7

Turkey

7.98.5

18.8

33.6

7.1

0.6 0.71.2

2.7

34.0

Below-the line measures (loans and equity injections) and guarantees Above-the line measures (revenue and expenditure)

• Initially the Netherlands estimated spending measures of € 10-20bn. According to De Nederlandse Bank, Dutch government support and measures are now estimated to cover € 30bn for 2020 in total.

• Both Italy and Germany invest heavily in guarantees in companies facing liquidity issues and support in refinancing.

Source: IMF Fiscal Monitor April 2020, de Nederlandse Bank, Deloitte analysis

• Below the line measures generally involve the creation of assets, such as loans or equity in firms. Above-the line measures include additional spending (e.g. health services and unemployment benefits), capital grants and targeted transfers (e.g. wage subsidies or direct transfers), or tax measures (e.g. tax cuts or other reliefs) provided through standard budget channels

• Note, the government support is ongoing and figures as presented above are outdated in many cases already as governments across the world have been announcing new support measures.

• In terms of absolute amounts the US has per April 2020 the highest direct spending of c $ 1400bn. This includes several measures such as paid sick leave, food assistance, free virus testing, deferral of tax payments and tax rebates: $ 1200 for singles, $2400 for married couples filing jointly and $500 per qualifying child.

COVID-19 Government Support G-20 + NL (percentage of GDP)*


According to the IMF, the COVID-19 outbreak will cause a major increase in fiscal deficits and public debt ratios



• Based on scenario analyses performed by the Netherlands Bureau for Economic Policy Analysis (CPB), fiscal overall balance in the Netherlands in 2020 will amount to c. 5.7%*.

• According to the IMF Fiscal Monitor April 2020, global debt (public and private) reached $188 trillion (226 percent of GDP) in 2018.

• Fiscal balances in 2020 are expected to deteriorate in almost all countries, with most sizable estimated expansions in the United States, Canada and Spain.

• Average public debt in 2020 is expected to rise substantially in all countries due to the crisis. Especially, in the United States, Canada and Italy government debt as a percentage of GDP is expected to grow by more than 20%.

• Due to all support measures, IMF expects global debt to increase by 13 percentage points to reach 96.4 percent of GDP in 2020.

Emerging Markets & Middle-Income

Economies

Euro Area

-15.4

Italy

-8.3

Low-Income

Developing Countries

Netherlands

1.4

Japan United Kingdom

-4.8

Spain

-5.5

Canada United States

Germany

-5.8

-9.2

-2.8-4.1

-5.7-7.1

1.7

-5.7

-1.6

France

-7.5-8.3

-2.1

-9.1

-0.7

-11.8

-0.4

-2.6

-9.5

-3.0

-11.4 -9.6

2019 2020

4353 49

60

85 84 89 96 99109

135

237

4762 58

69

96 97110 113 115

131

156

252

CanadaLow-Income

Developing Countries

Emerging Markets & Middle-Income

Economies

Netherlands SpainGermany United Kingdom

Euro Area France United States

Italy Japan

+21+22

+21

2019 2020

General Government Debt 2019 – 2020 (percent of GDP)

* CPB Scenario’s: Average of scenario 2 and 3

General Government Fiscal Overall Balance 2019 – 2020 (percent of GDP)

Source: IMF Fiscal Monitor April 2020, CPB Scenario’s corona crisis (March 26 2020 – average of scenario 2 and 3), Deloitte analysis

3. Economy recovery scenarios

COVID-19 – Business valuation during a period of uncertainty10


• Market consensus by leading economic organizations indicates a V-Shaped economic impact is expected for major economic regions following COVID-19: showing an economic slowdown in 2020 followed by a relatively sharp upward recovery in 2021.

• The most affected regions are the EU and the US, being consistent with the higher number of confirmed COVID-19 cases in these regions relative to China and the rest of Asia.

• Dutch banks also provided worst case economic scenarios in case of a more prolonged and severe COVID-19 measures.

Leading economists expect a V-Shaped economic impact resulting from COVID-19 for major economic regions

Economy recovery scenarios


2019 2020 2021

-7%

2%

-7%

-8%

-6%

5%

6%

1%

6%

IMF EIUS&P Eurostat

2019 2020 2021

5%

2%

-6%-5%

-3%

-7%

6%

2%

5%

IMF S&P EurostatEIU

2019 2020 2021

8% 8%

7%

1%

6%

9%

EurostatEIUIMF S&P

Europe ChinaUnited States

Forecasted annual GDP Growth (%) by IMF, S&P, EIU

Forecasted annual GDP Growth (%) scenarios by Dutch banks

Europe

Source: ING, Rabobank, Deloitte analysis

* Average of Rabobank and ING growth forecast

Source: IMF, S&P, EIU, Eurostat, Deloitte analysis

-20%

-15%

-10%

-5%

0%

5%

10%

15%

2019 2020 2021

1%

-5%

-14%

4%

6%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

2019 2020 2021

5%

6%

3%

-1%

6%

Base case Worst case Base case Worst case-20%

-15%

-10%

-5%

0%

5%

10%

15%

2019 2020 2021

2%

-7%

-16%

4%

7%

Worst caseBase case

ChinaUnited States


Within Europe, Southern European countries are expected to experience the biggest decline in GDP in 2020, while in 2021 these countries are expected to have the highest recovery rates


GDP recovery Europe forecast 2021

0%

5%

10%

15%

20%

Italy

Port

ugal

Gre

ece

Spain

Sw

eden

Cro

atia

Fin

land

Fra

nce

Lithuania

Bulg

ari

a

Slo

vakia

Esto

nia

Latv

ia

Cypru

s

Pola

nd

Irela

nd

Hungary

Slo

venia

Belg

ium UK

Rom

ania

Denm

ark

Luxem

bourg

Neth

erl

ands

Malta

Austr

ia

Czechia

Germ

any

Euro

are

a

EU

• Europe is leading into a (technical) recession in the first half of 2020. According to Eurostat, the EU will experience a GDP drop of 7.4% in 2020, and a growth of 6.1% in 2021.

• Southern European countries which have a large tourism industry (in terms of GDP percentage: Spain:11.8%, Portugal: 8.0%, France: 7.4%, Greece: 6.8%) are impacted the most in terms of GDP growth.

• The unemployment rate in the EU is forecasted to increase from 6.7% in 2019 to 9% in 2020 but is expected to partly recover to 7.9% in 2021.

• Southern European countries, such as Spain and Italy, will see the largest unemployment rate in 2020. This is partly driven by their country specific labour market conditions such as share of temporary contracts and self employed workers.


Source: Eurostat, Deloitte analysis

GDP loss Europe forecast 2020

Unemployment rate Europe

2019 20212020

12

≤ -9%

≤ -8%

≤ 7%

≤ -6%

≤ -5%

≤ -4%

GDP growth

≥ 7%

≥ 6%

≥ 5%

≥ 4%

≥ 3%

≥ 2%

GDP growth


The Netherlands Bureau for Economic Policy Analysis (CPB) has developed 4 scenarios of the economic impact of COVID-19 for 2020 and 2021. In all scenarios a recession is expected for 2020, with Dutch GDP shrinking between 1.2% and 7.7%


13

Base Scenario 4Scenario 1 Scenario 3Scenario 2

-7%

-1%

20202019 2021

2%

-5%

-8%

3% 4%

2%

-3%

103

100

97

92

85

90

95

100

105

Q2Q4 Q2Q1 Q3 Q1Q4 Q3 Q4

Pre-crisis Scenario 3Scenario 1 Scenario 2 Scenario 4

FY19 FY21FY20

GDP - Netherlands

GDP growth - Netherlands

Source: CPB March 2020, Deloitte Research

Scenario 1

• In the first scenario, the lockdown lasts three months.

• We can expect a decline in the service sector in the second quarter with a speedy recovery in the third.

• Companies will continue to grow in 2020 and catch up on the losses from the second quarter.

Scenario 2

• In the second scenario, the restrictive measures last for six

months.

• We can expect a recovery in the fourth quarter.

• In this scenario the economic crisis is expected to continue to affect other business and other industries compared to the first scenario. Trade continues to be negatively affected.

• Despite these declines, no problems in the financial sector are expected in this scenario.

Scenario 3

• In the third scenario, the restrictive measures will also last for six months, however, the economic shock hits harder.

• We will experience more problems in the global economy and the financial sector.

• Economic slowdown is expected to last longer and the economic recovery will start in spring 2021.

Scenario 4

• Restrictions will not be lifted until the second quarter of 2021.

• Firms and household will find more ways to produce, work and consume despite the restrictions.

• Therefore the depth of the crisis is initially somewhat less than in scenario 3. However the recession is expected to last for at least a year and a half.

• Recovery is expected to occur in the second half of 2021.



According to the Dutch central bank (DNB), the Dutch economy will shrink by 6.4% in 2020, with a gradual recovery in 2021 and 2022


314

434

702

553

0

1

2

3

4

5

6

7

8

0

200

400

600

800

1.000

1.200

1.400

1.600

3%

2019

5%

6%

2020

7%

2021 2022

Unemmplyment (x1000) (right-hand axis)

Unemployment (as % of labour force )

2%

1%

2%

1%

2019 2020 2021

1%

1%

2%

2022

Total salary and wage expenses Inflation rate

3%

GDP growth

Impact on wages and inflation, change in %

(base case)

Impact on the labour market, change in %*

(base case)

• The Dutch Central bank (DNB) forecasts a deep recession for the Dutch economy in 2020. In the base case scenario the Dutch economy will shrink with 6.4% in 2020, being the worst contraction since World War II. The GDP is expected to recover gradually in 2021 (+2.9%) and 2022 (+2.4%).

• The decrease of GDP in 2020 is mainly driven by the large decline in export, which is a large portion of the Dutch GDP. In 2021 export is also the main driver of the Dutch GDP growth.

• The base case assumes that most of the Dutch government measures introduced in March will be eased after 3 moths. While still having a minimal amount of measures until a vaccine will be available mid 2021.

• The impact on the labour market is expected to be mild compared to the impact on GDP in 2020. This can be explained by the government measures taken aimed at retaining employees. Furthermore, due to labour market rigidity it takes several quarters to see change. The labour market is therefore expected to be more severely hit after 2020.

Private consumption growth Export growth

20 21 22

11%

4%

-11%

7%

-8%

-16%

3%

6%

10%

20 21 22

6%

10%

8%

-16%

-6%

-11%

4%

20 21 22

2%

-6%

-3%

-12%

3%

5%

22%

5%

Base Mild Severe

Source: DNB, Economische Ontwikkelingen en Vooruitzichten - juni 2020

*Except for unemployment, which is in absolute terms

14COVID-19 – Anticipated recovery and financial forecasting


− The Consumer Discretionary sector is expected to also see a strong decline due to the high impact of the lockdown.

− Decline in the Industrial sector is mainly driven by production stoppages as a result of supply chain disruptions and workforce dislocations.

− Sectors like Health Care and Communication Services are expected to weather the storm, as these segments are less exposed to a near-term contraction in consumer spending due to COVID-19.

− The AEX index shows a larger decline compared to the MSCI index. This is explained by the fact that Shell, which is highly impacted (40% loss in forecasted revenue), overrepresents the AEX index in terms of revenue.

Analysts predict lower revenues across all sectors for the upcoming years relative to pre-COVID-19 predictions. We observe that the Energy sector shows the highest decrease in expected revenue for the period 2020 - 2024 as per 31 May 2020 relative to pre-COVID-19 forecasts



-1 -2-4

-5 -5-6 -6

-12 -12

-16

-34

-7

-24

-1-2 -2

-5 -5 -5-6

-9 -8

-12

-18

-6

-16

-2 -1-2

-5

-3

-5 -5

-9-7

-11

-6

-9

-1 -1-2

-5

-16

-6 -6-7 -7

-9

-4 -5 -5

-10

Source: CapitalIQ, Deloitte analysis

In the appendix a description of the industry classification of CapitalIQ is presented

Loss in forecasted revenue (in %), MSCI Europe Index

Note: The reported percentage decrease are the delta between analyst estimates per 1 January 2020 compared to their latest estimates as per 11 May 2020.

• Equity analyst adjusted their original revenue forecast (1 January 2020) to reflect the impact of COVID-19.

• As of May 31, 2020 analyst predict the following:

− Firms in the Energy sector are expected to be most severely affected. This is mainly driven by the sharp decline in oil prices.

1

1

2

2

3

3

4

4

5

5

2020 20232021 2022

Health Care Consumer Staples

Information Technology

UtilitiesCommunication Services

MaterialsIndustrialsReal Estate Consumer Discretionary

Financials Energy MSCIEurope

AEX

© 2020 Deloitte The Netherlands COVID-19 – Anticipated recovery and financial forecasting 16

• Dramatic change in behaviour and public policy

• Deep but quick recessions in EU and US

• Major fiscal programs in EU and US will help to limit the damage

• Duration: 6 quarters

Mild

Hars

hSevere

• Slow rebound of Chinese economy

• Long and deep recession in the west will impact the supply chain and consumer demand

• Fiscal programs will limit business failures but will not boost spending


• Financial system collapses, despite the monetary policy. Fiscal stimulus is large but fails to boost spending

• Many business failures and household disruptions

• widespread and enduring nationalization of industries takes hold


Real GDP growth in 2020 “Mild”

-5% -5% 3%

-8% -8% 1%

Real GDP growth in 2020 “Harsh”

-10% -10% -3%

Real GDP growth in 2020 “Severe”

Three economic scenarios have been developed by Deloitte that consider the future impact of COVID-19 on the world economy in the next 18-24 months


Timing of recovery

For further reference please read Deloitte article “Recovering from COVID-19. Economic cases for resilient leaders. 18-24 months”

• Deloitte Global developed three scenarios concerning the macro-economic impact of COVID-19 on the world economy.

https://www2.deloitte.com/content/dam/Deloitte/global/Documents/About-Deloitte/COVID-19/gx-economic-cases-for-resilient-leaders.pdf


Based on the analysis ‘After the shock: Learning to thrive in a (post-)COVID-19 world’ Deloitte Netherlands shows a base case scenario where “disruption interval” will be experienced in the world with various small shocks over the next 12 to 18 months


17For further reference please read Deloitte article “After the shock: Learning to thrive in a (post-)COVID-19 world”

Cases economic impact COVID-19

Infection rate

The infection rate can be measured by

the basic reproduction number

(R0). The RIVM estimates an R0 of

2.3 based on a scenario without

interventions, which means that every

person infects on average 2.3 other

persons.

Health impact

The impact of the infection rate on the

health system should be based on

the total number of infections, including

the non-reported. One important

indicator for the health impact is the

IC admission rate and the duration in

IC.

Capacity

Capacity is the extent to which we

can cope with the health impact.

Capacity can be measured by the

number of available IC beds, and the

extent to which this can be increased in

peak periods.

Duration

The duration is the time until the virus

spread stops. The virus can be stopped

with the develop-ment of a vaccine, a

medicine herd immunity or a

natural break such as the summer

period.

COVID-19 spread in the Netherlands

Impact COVID-19 variables

0

200

400

600

800

1.000

1.200

1.400

Num

ber

of daily c

ases

31-12-19 15-03-20 31-05-20

Disruption due to interventions

March-June 2020 Summer 2020 6-12 months

Cure / Vaccine

*Post-Covid world

Base case: “Disruption interval” world

Base case

• Various small shocks in the next 12 to 18 months

• Economy will recover will gradually• World economy will experience a moderate

recession

Best case

• Transient shock on demand and supply chain• Recovery in summer 2020

• Future intervention's will have a minimal impact on the economy

Worst case

• Long lasting shock on demand, trade and supply chain

• Recovery in late 2021• World economy will tip into a lengthy

recession

Conceptual and indicative


• A number of variables related to the characteristics of the virus, capacity and quality of the healthcare system and effectiveness of health care interventions are at play when it comes to assessing the economic impact of COVID-19 on the economy. Based on the interaction of these variables, Deloitte Netherlands developed three cases.

https://www2.deloitte.com/nl/nl/pages/strategy-analytics-and-ma/articles/after-the-shock-learning-to-thrive-in-a-post-covid-19-world.html

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

COVID-19 – Business valuation during a period of uncertainty18


To assess the impact of the current market environment on long-term business plans and business enterprise valuations, we propose a four-step approach, starting with an assessment of the pre-COVID-19 business plan

Financial forecasting and business valuation under COVID-19 circumstances


3. Scenario development

• Company specific scenarios are developed based on different forecasts geared towards assumptions regarding revenue loss and recoverability. Further, scenarios should be developed around a line by line analysis of P&L and cash flow items, such as OPEX, and cost of goods sold.

• Many business valuations are being conducted on an income approach, discounted cash flow method (“DCF”). Due to the ability to model uncertainty in financial scenarios, a DCF analysis has become even more important now.

• In this method the fair market valuation of a company is based on a company’s explicit forecast period, after which a steady state in terms of profitability and cash flows is assumed.

• The DCF analysis is based on the sum of the present values of the projected free cash flows (“FCF”) and the terminal value (“TV”). The sum of the present values of the projected cash flows and the terminal value equals the enterprise value of a company.

• As a first step we recommend to take the business plan pre-COVID-19 to get an understanding of the impact of the COVID-19 crisis on the actual performance and for the years going forward. Based on factors discussed in step 3, necessary adjustments should be made to the business plan to reflect new market expectations.

1 Assess current business plan1. Assess current business plan

• The first step consists of reviewing the current business plan of the company. This original pre-COVID-19 forecast will be used as a starting point in scenario development for the post COVID-19 forecast. Necessary adjustments to reflect the COVID-19 impact are made in accordance with the next steps.

2. Formulate a recovery playbook

• Estimate the current year (2020) impact and formulate a recovery plan. This step consists of reviewing the extent to which company specific factors are affected by COVID-19, taking into account the already measurable effect.

4. Risk adjustment

• Lastly, the uncertainty around the impact of COVID-19 on future cash flows should be reflected in an appropriate market based discount rate or weighted average cost of capital (“WACC”). Appropriate risk adjustments to e.g. the market risk premium should be included in the discount rate.

FY24FY23FY21FY19

Revenues &

EBIT

DA m

arg

in

FY20 FY22 FY25 Terminal Value

Label

Explicit forecast period

Sensitivity analysis -EBITDA margin

Sensitivity analysis -Revenue growth

Terminal Value period

Perpetual growth rate risk free rate

Stable EBITDA margin

Source: Deloitte analysis



C-suite consideration for the recovery playbook along 6 macro business dimensions


2 Formulate a recovery playbook

• The second step is to assess the impact of the COVID-19 on the FY2020 business plan and to define a recovery plan.

• The recovery playbook identifies six key items, and addresses several strategic questions for the C-suite to consider in setting scope and direction for the recovery plan.

• The shift from respond to the COVID-19 situation to recover requires a mindset pivot from an internal, functional view to the outcome-based view.

• By analysing each dimension and positioning of a firm accordingly, a company can assess the potential impact of COVID-19 on revenues and free cash flows for 2020. Organizations that are successful in the recovery phase must anticipate outcomes and ensure that the path to success is defined by stakeholder-focuses outcomes rather than internally focused functional processes.

• One of the key questions companies are facing is when they should pivot to recover? Due to the pervasive, far reaching medical and economic variables, there is no easy answer to this question.

• The right time to expect recovery will vary across geographies and sectors, and even among different companies in the same geography and sector.

For further reference please read Deloitte article “The essence of resilient leadership”

Outcome Description Key question

Recover and grow revenue

Recapture revenue and expand into new organic opportunities for top-line growth, customer experience, and profit margin

• Should we engage customer for acquisition or maintenance?

• What customer behaviour changes are likely to be permanent?

Increase margins and profitability

Adjust cost structure and investments

• Should we manage for profit or resilience?

Optimize assets, liabilities and liquidity

Curate asset portfolio (including M&A transactions), strengthen the balance sheet, and align the capital structure

• Should we operate for cash or profit?

Accelerate digital transformation

Accelerate digital capabilities to enable growth, decrease costs, and progress further as an insights-driven organization

• How can we move faster toward digital transformation?

Support the workforce and operating structure

Align the work, the workforce, and the workplace -as well as operating models, business models, and alliances- to deliver the Recover plan

• How has the social contract with workers changes?

• Do we have the right operating structures and alliances in place to deliver the plan?

Manage stakeholders expectations

Manage and fulfil stakeholder expectations while proactively addressing risks

• How have social and institutional expectations changed?

1

2

3

4

6

5

https://www2.deloitte.com/us/en/insights/economy/covid-19/guide-to-organizational-recovery-for-senior-executives-heart-of-resilient-leadership.html


Based on the current year impact, scenarios are established to assess how much of the COVID-19 revenue losses can be recouped by the end of the forecast period




• While recovery action plans are defined to secure a business future in the short term, companies need to develop flexible business plans and robust financial forecasts and projections which takes into account the unknown duration, severity and impact of the COVID-19 crisis.

• This uncertainty means companies ness should plan for a different number of scenarios, involving people from all relevant departments. Some guiding principles for scenario-based planning are:

− Define plausible alternate futures in which your decision will be assessed. We suggest having three to four scenarios.

− Focus on key drivers for the organisation. We suggest no more than five key drivers for each core business.

− Generate a range of operating and financial forecasts for your business to reflect potential vulnerabilities, mitigating action and potential upsides.

20252019 2020 2021 2022 20242023

Pre crisis Scenario 1 Scenario 2 Scenario 3

Pre-crisis

Scenario 3

Scenario 1

Scenario 2

The pre-COVID-19 forecast refers to the original business plan. In this situation, the normal course of business is projected without taking into account COVID-19 effects.

In scenario 3, no losses are recouped in subsequent years, as the company is not able to realize higher growth rates relative to the original forecast.

In scenario 1 the revenues for 2020 deviate from the business plan due to the impact of COVID-19. By the end of the forecast period 100% of the losses relative to the original forecasted are recouped.

Similar to scenario 1, the revenues for 2020 are lower than the budget due to the impact of COVID-19. Contrary to scenario 1, only 50% of the losses are recouped by the end of the forecast period.

Revenues

3 Scenario development

Revenue recovery scenarios

Illustrative

− Use flexible time periods, forecasting for the short, medium and long-term in line with the nuances of each scenario.

− Define and monitor early indicators that can identify the signs that might differentiate between various scenarios.

− Forecast, reforecast and reforecast again, monitoring the evaluation of your response to foster agreement on how your assumptions may have to change.

• We suggest to make different scenarios in terms of expected revenues.

• The starting point concerns the unadjusted pre-COVID-19 revenue forecast.

• In all scenarios, the expected revenues for 2020 are expected to decrease according to the assessed impact in step 2.

• The scenarios are distinguished by the extent to which revenue losses relative to the original pre-COVID-19 are recovered in future years.

For further reference please read Deloitte article “COVID-19: Business and Capital Planning for the next Normal”


Probabilities should be attached to the various scenarios, taking into account the different dimensions regarding the COVID-19 crisis



Revenues

202320222018 2019 20212020 2024 2025

Scenario 1

Scenario 2

Scenario 3

• Based on the identified scenarios and resulting forecasts, probabilities can be attached to each scenario.

• An important consideration in assessing the likelihood per scenario is to analyse which internal and external factors will determine each possible outcome.

• After probabilities have been attached to each scenario, a weighted average business enterprise valuation can be calculated by multiplying the business enterprise valuation in each scenario by its respective probability.

• Alternatively, scenarios can also be run to estimate the fair value of the business enterprise value per scenario without the use of (explicit) probabilities.

Pre-crisis scenario Actuals

Probability weighted scenarios*

25%

50%

25%

Scenario probability

*for illustrative purposes




To further tailor the forecast per revenue scenario, P&L items should be assessed on a line by line basis in order to determine the exact impact


CapexOpexRevenues COGS EBITDA Adjusted taxesGross margin Changes in NWC Free cash flow

• Revenues

• The starting point in assessing the impact on free cash flows is to estimate the effect of COVID-19 on revenues. As shown on the previous page, revenue recoverability plays an important role here. Per revenue scenario, a further differentiation can be made on the underlying P&L items.

• Cost of Goods Sold (“COGS”)

• COGS are mostly variable expenses and directly linked to the revenues. Hence, a reduction in revenues as a result of COVID-19 likely has a direct impact on COGS.

• Operating expenses (“OPEX”)

• The impact of COVID-19 on operating expenses is influenced by the proportion of fixed and variable components. A higher proportion of fixed costs may make it more difficult to cut expenses. On the other hand, companies that can safe more variable expenses, e.g. by cutting temporary staff, may be in a better position to reduce necessary cost savings. Also any expected support from (local) governments for e.g. salary compensation should be assessed and taken into account in the financial forecast.

• Capital expenditure (“CAPEX”)

• An important factor to assess here is the priority of planned projects. Important considerations are to balance the level of urgency with potential cost savings, without compromising long-term strategic initiatives. Cash flows could also be improved by divesting non core assets or poorly performing assets.

• Net working capital (“NWC”)

• The NWC position may be directly related to revenue levels. Lower revenues as a result of COVID-19 may require a lower NWC position.

• More efficient working capital management can help to improve cash flows. Examples are to increase days of payables outstanding or to reduce days of sales outstanding.

1

2

3 4

5

1 2

3

4

5

Simplified cash flow calculation (illustrative)


0,0%

0,0%

0,6%

-0,6%

-0,3%

0,0%

0,3%

0,6%

0,9%

1,2%

1,5%


Discount rates must be adjusted to reflect the uncertainty in the market around the impact of COVID-19


4 Risk adjustment Change in implied EMRP* since 01-01-2020

**

** Normalised (based on earning estimates per mid-April, 2020)

* Based on proprietary model that calculates implied expected equity risk premium (i.a. based on earnings estimates and certain cashflow adjustments)

01-01-2020

2.0%

01-03-2020

2.5%

01-02-2020 01-04-2020

0.0%

0.5%

1.0%

1.5%

3.0%

1.3%

0.4%

0.7%

1.3%

2.8%

0.8%

Impact COVID-19 on EUR bond yields -

All Corporates* 10 years

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

1.5%

1.0%

0.0%

0.5%

2.0%

BE DEJPIT PT GBES CN FR NL US

1.4%

1.9%

0.0%

1.9%

0.6% 0.6%0.5%

0.4% 0.4%

0.0% 0.0%

Impact COVID-19 on Dutch government bond

yields - 30 years

Change in Country Risk Premium compared

to January 1, 2020

Source: Aswath Damodaran, CapitalIQ, Deloitte Analysis

The final step is to include an appropriate discount rate in your DCF analysis to reflect current market expectations. It is important to carefully consider each element of the discount rate. Further, to avoid the risk of double counting, risk adjustments made to the cash flows should not be simultaneously incorporated into the discount rate. Based on market inputs, we observed several changes in key element of the WACC.

• The uncertainty and risks around the economic impact of COVID-19 resulted in a decrease of the yield on most European government bonds, especially in March.

• The sharp decline in share prices has increased the Equity Market Risk Premium (EMRP) required by investors. Our proprietary model indicated an increase of 0.5% - 1.0% for the Eurozone compared to pre-crisis levels (6.5% until April 1, 2020).

• The unprecedented volatility in the market led to changes in the country risk premium (CRP). Despite the high volatility observed, the CRP for the Netherlands, Germany and United States did not change.

• COVID-19 resulted in increased corporate bond yields, particularly on the lower rated debt.

1

2

3

4

01-01-2020 01-04-202001-02-2020 01-03-2020 01-05-2020 01-06-2020

0.7%

Germany

Netherlands France

UK

1

3

2

4

0%

4%

8%

12%

16%

20%

1.6%

05/2001/20

16.1%

7.5%

10 Yr B

10 Yr BBB

5. Appendix


Appendix


The Global Industry Classification Standard (GICS®) was developed by S&P Dow Jones Indices and MSCI. The GICS structure consists of 11 Sectors and 24 Industry groups

GICS industries

• Industrials

• Capital Goods, Commercial & professional Services, Transportation

• Materials

• Chemicals, Construction material, Containers & packaging, Metals & Mining, Paper & Forest products

• Energy

• Energy Equipment & Services Oil, Gas & Consumable fuels

• Financials

• Banks, Diversified Financials, Insurance

• Information Technology

• Software & Services, Technology, Hardware & Equipment, Semiconductors & Equipment

• Communication Services

• Telecommunication Services, Media & Entertainment

• Consumer Discretionary

• Automobiles & Components, Consumer Durables & Apparel, Consumer Services, Retailing

• Utilities

• Consumer Staples

• Food & Staples Retailing, Food, Beverage & Tobacco, Household & Personal Products

• Real Estate

• Healthcare

• Healthcare Equipment & Services, Pharmaceuticals, Biotechnology & Life Sciences


Deloitte Valuations & Modelling the Netherlands


Direct: +31 (0)88 288 0608

Mobile: +31 (0)6 5585 3480

Email: [email protected]

Jeroen van der Wal

Partner Valuations & Modelling

Direct: +31 (0)88 288 1554

Mobile: +31 (0)6 1258 0326


Pieter van den Berg

Director Valuations & Modelling

Direct: +31 (0)88 288 2642

Mobile: +31 (0)6 2078 9518


Maurits van Maren

Partner Valuations & Modelling

Direct: +31 (0)88 288 7289

Mobile: +31 (0)6 2319 8640


Robbert Douglas

Senior Manager Valuations & Modelling

Direct: +31 (0)88 288 1655

Mobile: +31 (0)6 5261 5048


Marina Hristova


Direct: +31 (0)88 288 4588

Mobile: +31 (0)6 1234 2721


Ralf Meulenberg


Direct: +31 (0)88 288 7968

Mobile: +31 (0)6 8355 5194


Matthijs Wouterse

Director Valuations & Modelling

Direct: +31 (0)88 288 7928

Mobile: +31 (0)6 8355 5104


Casper Schiernecker


Direct: +31 (0)88 288 7795

Mobile: +31 (0)6 8333 9608


Niels Coppoolse

Manager Valuations & Modelling

Direct: +31 (0)88 288 3857

Mobile: +31 (0)6 2079 9194


Marijn van Kempen


Direct: +31 (0)88 288 1664

Mobile: +31 (0)6 8201 9355


Joren Verkade


Direct: +31 (0)88 288 4886

Mobile: +31 (0)6 8201 2242


Chloe Peng



Glossary of terms and References


AEX Amsterdam Exchange Index

i.a. inter alia (“among others”)

c. circa

CBOE Chicago Board Options Exchange

COGS Costs of goods sold

CNWC Change in net working capital

CRP Country risk premium

DCF Discounted Cash Flow

EBIT Earnings Before Interest and Taxation

EBITDA Earnings Before Interest, Taxation, Depreciation and Amortisation

EMRP Equity Market Risk Premium

EUR Euro

EV Enterprise Value

FC Forecasted

FCFF Free cash flow to the firm

GDP Gross Domestic Product

IMF International Monetary Fund

MSCI Morgan Stanley Capital International

OPEX Operating expenses

VIX Volatility Index`

WACC Weighted Average Cost of Capital

• Capital IQ

• CPB Netherlands Bureau for Economic Policy Analysis (2020), Corona crisis scenarios (26 March 2020)

• Deloitte (2020), After the shock: Learning to thrive in a (post-)COVID-19 world

• Deloitte (2020), The essence of resilient leadership: Business recovery from COVID-19

• Deloitte (2020) COVID-19: Business and Capital Planning for the next Normal

• Deloitte (2020) Recovering from COVID-19. Economic cases for resilient leaders. 18-24 months

• DNB (2020), Economische Ontwikkelingen en Vooruitzichten - juni 2020

• Eurostat (2020), European Economic Forecast. Spring 2020

• ING (2020), Four scenarios for the global economy after Covid-19

• International Monetary Fund (2020), World Economic Outlook: The Great Lockdown

• International Monetary Fund (2020), Fiscal Monitor April 2020

• NYU University/Professor Aswath Damodaran (2020), A viral market meltdown

• Rabobank (2020), Global Economic Contraction: Re-assessing the impact of COVID-19

• RIVM (2020), COVID-19 in graphs

Glossary of terms References

Source: The essence of resilient leadership, Deloitte

https://www2.deloitte.com/nl/nl/pages/strategy-analytics-and-ma/articles/after-the-shock-learning-to-thrive-in-a-post-covid-19-world.html

https://www2.deloitte.com/us/en/insights/economy/covid-19/guide-to-organizational-recovery-for-senior-executives-heart-of-resilient-leadership.html

https://www2.deloitte.com/content/dam/Deloitte/global/Documents/About-Deloitte/COVID-19/gx-economic-cases-for-resilient-leaders.pdf


Disclaimer Notice on behalf of S&P, its affiliates and their suppliers on information contained in this report:

Reproduction of any information, data or material, including ratings, from S&P, its affiliates and their suppliers, that is contained in this document (“Content”) in any form is prohibited except with the prior written permission of the relevant party. Such party, its affiliates and suppliers (“Content Providers”) do not guarantee the accuracy, adequacy, completeness, timeliness or availability of any Content and are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such Content. In no event shall Content Providers be liable for any damages, costs, expenses, legal fees, or losses (including lost income or lost profit and opportunity costs) in connection with any use of the Content. A reference to a particular investment or security, a rating or any observation concerning an investment that is part of the Content is not a recommendation to buy, sell or hold such investment or security, does not address the suitability of an investment or security and should not be relied on as investment advice. Credit ratings are statements of opinions and are not statements of fact.

29

Disclaimer


Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company

limited by guarantee, and its network of member firms, each of which is a legally separate and

independent entity. Please see www.deloitte.com/about for a detailed description of the legal

structure of Deloitte Touche Tohmatsu Limited and its member firms.

This communication contains general information only, and none of Deloitte Touche Tohmatsu

Limited, its member firms, or their related entities (collectively, the “Deloitte Network”) is, by

means of this communication, rendering professional advice or services. Before making any

decision or taking any action that may affect your finances or your business, you should

consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible

for any loss whatsoever sustained by any person who relies on this communication.

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

Documents

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