Ryanair and C&C shares 'most exposed' as UK exit risks mount
Published 25/02/2016 | 10:34
Ryanair, drinks group C&C and agri-services company Origin Enterprises are among the companies most exposed to a further weakening in sterling, specialist bank Investec has warned.
The pound hit a seven-year low against the dollar yesterday and touched 79 pence versus the euro as banking giant HSBC warned that a vote to pull out of the European Union could see the value of sterling slump by a fifth against the greenback.
And it if the pound were to slip further, the most obvious winners include Irish companies reporting in sterling, but with significant earnings in euro, such as Paddy Power Betfair, DCC and Grafton.
It’s well known that a weakening pound is bad news for Irish exporters into the UK as it cuts margins. A report by Investec analyst Gerard Moore and chief economist Philip O’Sullivan sets out the possible winners and loser from the sterling volatility, with Michael O’Leary’s Ryanair among the businesses vulnerable to taking a hit.
About 27pc of its sales are in the UK, according to Investec.
The specialist bank believes that if a so-called Brexit were to occur, for the airline any impediment to the free movement of passengers would likely add to costs, and would be passed on to customers.
Origin Enterprises would see the operational risk of withdrawal of EU subsidies to its farming clients, Investec said, with 60pc of its sales in Britain.
Assuming sterling weakens further, the bank said the most obvious winners include Paddy Power Betfair, DCC and Grafton, the Investec report said.
Investec said that although DCC has 59pc of its sales in the UK, a 10pc fall in the value of sterling would be an accounting boost for the company as its new operations in France and existing business across Europe would be translated at better rates.
Ryanair yesterday called for Britain to remain in the European Union, with chief executive Michael O’Leary arguing that the UK economy and its future growth prospects are stronger inside the EU.
“Leaving Europe won’t save the UK money or red tape because, like Norway, the UK will still have to contribute to Europe, and obey its rules if it wants to continue to trade freely with Europe, so it’s clear that UK voters should vote Yes to Europe and Yes to the reformed Europe, that David Cameron has delivered,” Mr O’Leary argued.
STERLING HITS SEVEN-YEAR LOW
Sterling sank to a seven-year low yesterday as companies and investors rushed to insure themselves against the chances of a British exit from the European Union that HSBC said could knock off a fifth of the value of pound.
The aftermath of Prime Minister David Cameron’s announcement of a June 23 referendum on ‘Brexit’ has driven the worst three days for the world’s fourth most traded currency since the depths of the financial crisis in 2009.
Another wave of selling in London yesterday morning drove it to less than $1.39, within 4 cents of levels not seen since it sank to parity to the dollar in the mid-1980s.
Britain’s biggest bank, HSBC, warned that sterling could lose up to 20pc of its value against the dollar and UK economic growth could be up to 1.5 percentage points lower next year if Britons vote to leave the European Union.
The hit to growth could be even more severe if the Bank of England raises interest rates to counter the sharp fall in sterling, HSBC added.
“There are very few people willing to take the other side of the move lower,” said Josh O’Byrne, a strategist at Citi.
“Knowing now that the vote will be in June, there is a greater incentive for those that haven’t hedged GBP exposure to do so.”
The latest poll showed the “In” camp only narrowly ahead at 51pc, versus 39 percent for “Out”, with 10pc undecided. Other polls have been even closer.
Sterling fell to $1.3878 with analysts saying the 2009 low of against the dollar a real prospect. It fell 0.6pc to its weakest in 16 months against the euro.
The cost of currency derivatives, which allow companies, big institutional investors and hedge funds to protect future revenues, jumped to their highest in more than four years.
Analysts at Investec said they continue to believe that a so-called Brexit will not happen, in which case, sterling should strengthen again after the referendum on June 23.
“If we’re wrong, the uncertainty that a decision to leave would generate would clearly hurt many Irish exporters and likely lead some firms to defer investment decisions in the short term,” one analyst said.
“In the longer-term, the enduring impact of Brexit on Ireland will be likely framed by the trading relationship agreed between the UK and the rump-EU.
“In the near term, we would likely see more downside pressure on sterling, which would be negative for Irish exporters to the UK.”