Thursday 20 July 2017

Tory toff Boris Johnson hits Irish exporters for six

Boris Johnson apparently invited Liz Hurley to his dinner party Brexit think-in. She didn't turn up Photo: PA
Boris Johnson apparently invited Liz Hurley to his dinner party Brexit think-in. She didn't turn up Photo: PA
Richard Curran

Richard Curran

There is a story told about a young Tory Party MP entering the British House of Commons for the first time, accompanied by an older veteran colleague.

Looking across at the Labour Party benches, the youngster remarked that "it is great to look the enemy in the eye".

To which the veteran replied: "They are the opposition. The enemy are all on this side of the house."

David Cameron might reflect on this story in a week when Boris Johnson came out in favour of a British exit from the EU. The news helped drag down the value of sterling on currency markets as it was seen to add to the uncertainty of the outcome of the June referendum.

On this side of the Irish Sea many exporters must have looked on with bafflement. How could Boris Johnson - that colourful but clownish Mayor of London, who doesn't even sit at the British Cabinet table - make their exports to the UK more expensive for people to buy?

The hapless Johnson apparently invited Liz Hurley to his dinner party think-in on how to play Brexit, but she didn't show up.

Irish tourism could even take a hit given the enormous influx of British tourists in recent years availing of a very preferential exchange rate which gave them great buying power. Andy from Essex might decide not to book his stag in Dublin, and go somewhere else.

If the British public votes to leave the EU, it won't actually happen for several years. The exit will have to be gradual, negotiated and painstakingly handled. In theory there is no economic reason whatsoever for sterling to fall now, ahead of the vote and years ahead of the exit, should it happen.

But traders trade on sentiment and events. It is ironic that Irish exporters might start feeling the pain of a Brexit in the short term, even though a Brexit might not actually happen. Currency hedging will help but it won't do the whole job.

Sterling has been on the slide against the euro for some time now, gradually eroding a huge competitive advantage that has lifted Irish exports, especially in food, and visitor numbers to this country.

A year ago, a British tourist could buy €1.36 with his British pound. Today it would be around €1.26. The 12-month slide has been about 7.5pc. That is actually a lot for businesses trading on thin margins. To put it in context, when Michael Noonan reduced the Vat rate for the hospitality and tourism sectors in 2011, it went from 13.5pc to 9pc. An Irish hotel could get €88.10 for a hotel room, add on 13.5pc Vat and flog the room night for €100.

With the reduced Vat rate, the hotelier could get the same income while selling the hotel night for €96. A year ago, that room night was costing Andy from Essex £70. Now it is closer to £76 and that's without the euro price of the room going up.

The 9pc Vat rate was hailed as creating thousands of jobs. Now we are seeing a 7.5pc swing in the other direction.

Johnson clearly has his eye on Number 10 in a winner takes all Tory leadership battle if the British public vote to leave. He may win. And that might be just the start of our problems.

California muscle men lift the mood at Glanbia

Who would have guessed it? Lycra-clad muscle men in gyms in California, pumping iron and guzzling protein drinks like Optimum Nutrition, are boosting the balance sheets of thousands of South Leinster farmers.

The phenomenal success of Glanbia's performance nutrition business last year saw it rake in more in earnings (€135.6m) than the bigger more established ingredients division. Glanbia's nutrition business earned close to €1bn in revenues.

The growth of this business has helped push up Glanbia's share price to around €18.44 after the results during the week. The farmer co-op owns 36pc of the plc, valuing that stake at €1.75bn.

In fact the co-op's shareholding has risen in value by €231m in the last two weeks alone. That is an average gain of €14,800 per farmer member since Valentine's Day.

That should certainly take some of the pain out of the poor dairy prices hitting Kilkenny and Waterford farmers since the EU milk quota regime ended. It also comes just eight months after farmers received €174m in a cash spin-out of Glanbia plc shares from the society.

With global sports nutrition showing no signs of slowing down, the success of the division will inevitably be contrasted with the impact that lower dairy prices are having on the global ingredients and dairy divisions.

Since Siobhan Talbot took over as chief executive in mid-2013, the performance nutrition business has grown sales from €655m to €923m. And the earnings margin on this business has also grown from 10.8pc to 14.7pc.

Yet the ingredients business has found the environment much tougher. Global market forces are to blame there but Glanbia is becoming a business of two stories.

Performance nutrition is the big higher margin growth story. Kerry Group found itself in a similar situation many years ago as it began to gain huge traction in ingredients. Yet it retained its very sizeable lower margin consumer foods division.

Glanbia's journey was similar but has taken on a whole new dimension. In its drive towards higher margin ingredients it also landed on performance nutrition and hit the jackpot.

When Talbot became chief executive the share price was €10.60 and it is up 74pc. Mind you it is up nearly 500pc since 2010. Can it keep going?

The lower dairy market prices go, the cheaper it is for the nutrition business to make its product. Bad news for one side of the business, is good news for the other.

With dairy markets likely to remain tough, the case for spinning out the performance nutrition business into a separate listed plc, is weakened.

Glanbia hangs better together, for now at least. Its future performance rests on the ability to deliver further growth in the nutrition sector, where more acquisitions will probably be needed. As for the rest of the business, just like its dairy farmer shareholders, it will have to ride out the cycle.

Boucher's challenge with the B of I share price

There were lots of reasons for some Bank of Ireland shareholders to be cheerful during the week. The bank put in a stellar 2015 performance and grew profits by 30pc to €1.2bn. Lending growth was up 42pc to €14.2bn and its non-performing loans continued to fall.

The really good news came when chief executive Richie Boucher said the bank would resume dividend payments in the first half of next year.

"We are generating more capital than we can invest in our business and think we should start distributing that to shareholders."

Boucher has steadied the ship at Bank of Ireland, returned it to profitability and is now poised to start paying dividends again. But when it comes to the bank's share price, he must feel a bit like Sisyphus, continually trying to roll that rock up the hill.

The dividend news isn't as good for shareholders who bought the stock in the last two years and stayed in. They are sitting on a loss.

Despite getting so much right at the bank, the share price just won't take off. The most recent falls were sectoral as it got caught in the international sell-off of global bank stocks.

Those who got in at the bottom, (yes there are some shareholders out there who bought at around 9c) are still sitting on a huge gain with the shares trading at 25c. But the bank stock rout in the early part of this year pushed the share price back by two years.

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