Saturday 17 November 2018

Irish companies face Brexit turbulence

'With a so-called hard Brexit now looking the most likely outcome, a slew of major Irish companies find themselves in the Brexit firing line.'
'With a so-called hard Brexit now looking the most likely outcome, a slew of major Irish companies find themselves in the Brexit firing line.'
Dan White

Dan White

With last week's toing and froing in Brussels having failed to produce any agreement, the odds on the UK crashing out of the EU next March without a deal have shortened even further. With a so-called hard Brexit now looking the most likely outcome, a slew of major Irish companies find themselves in the Brexit firing line.

With only five months left before the March 29 deadline for the UK's departure from the EU kicks in, the pressure is on for the two sides to agree a deal. Unfortunately, even if UK Prime Minister Theresa May's divided cabinet could be persuaded to agree on the terms of a divorce settlement with the EU, the chances of it being approved by the House of Commons seem remote.

All of which is bad news for this country. Ever since the June 23, 2016, referendum in which Britain voted to leave the EU, the Irish Government and companies here have pinned their hopes on the two sides somehow doing a deal that left Ireland largely unscathed. Twenty-eight months later, with no agreement still in sight, that's looking like an increasingly forlorn hope.

So which Irish companies are most exposed to a no-deal Brexit? With 35pc of Irish food and drink exports, about €4.5bn, going to the UK, our food companies are among the most vulnerable.

Unfortunately, Ireland's largest quoted food company, Kerry, doesn't disclose its UK sales. However, over 70pc of its consumer foods division's 2017 sales of €1.33bn, about €900m, were to UK customers. This division is already feeling the Brexit squeeze with 2017 trading profits falling by over 8pc to €108m.

On the face of it Glanbia is less exposed to the UK, with British sales of €72m - just 3pc of its €2.38bn turnover in 2017. This figure almost certainly massively understates Glanbia's true dependence on the British market, as it doesn't include the €1.5bn sales of its 40pc-owned affiliate Glanbia Ireland.

Troubled baked-goods producer Aryzta is another company that doesn't break out its UK sales, lumping them in with "other Europe". However, it does state that no individual country included in the "other Europe" category exceeds 10pc of total turnover with would mean that Aryzta's UK sales are a maximum of about €340m.

Following last week's sale of its US interests, Greencore is now virtually completely dependent on the UK market.

Despite this, chief executive Patrick Coveney says that his company is now almost completely "insulated" from the consequences of Britain's departure from the EU.

It's not just Irish food companies which have a major Brexit exposure.

Ryanair boss Michael O'Leary has been perhaps the most vocal Irish business person on the subject of Brexit, warning that a no-deal British departure from the EU could ground flights to and from the UK next March. He's right to be concerned. Ryanair's UK turnover was €1.64bn in the 12 months to March 2018, 23pc of its total turnover for the year.

Ferry operator Irish Continental could also find itself feeling the chill from Brexit. No fewer than 92pc of its 2017 sailings were to the UK as against just 8pc to France.

While boss Eamonn Rothwell will no doubt be hoping to increase the number of sailings to mainland Europe post-Brexit, there is no way his company can escape a post-Brexit storm.

DCC and UDG Healthcare are two other Irish companies that may have to batten down the hatches on March 29 next. A massive £7.7bn (DCC reports in sterling), or 54pc, of DCC's turnover for the year to March 2018 came from the UK while a quarter of UDG's Healthcare's 2017 sales were to UK customers.

Hotel operator Dalata is facing a potential Brexit double whammy. Not alone are a quarter of its hotel rooms located in the UK, about a quarter of Irish revenues come from UK customers. Add it all up and about 40pc of Dalata's revenues are either generated in the UK or come from British customers visiting Ireland.

Alone of the major Irish-owned banks, Bank of Ireland retains a significant UK business. It had a €32bn UK loan book at the end of June, over 40pc of its total €77bn loan book. How will the performance of these loans be affected by a disorderly Brexit?

With just 159 days left to Brexit day, Irish companies large and small are still hoping that Theresa May can cobble together some sort of an exit deal with the EU, and preparing for the consequences if she can't.

***

The proposed Uber IPO, and the valuations being speculated on for the ride-sharing company, tell us a lot about how the markets now view the legacy car companies as the internal combustion engine enters the twilight stage of its existence.

Last week saw a series of apparently well-sourced stories in the financial media telling us that Uber was contemplating an IPO in 2019.

According to whichever report one chose to believe, the IPO would value Uber at $100bn-$120bn, making it the second most valuable IPO in history.

While one might be inclined to dismiss the $120bn figure as a case of an investment banker talking up his bonus, even a $100bn valuation would make Uber more valuable than four of the five largest legacy car-manufacturing companies.

Only Toyota ($188bn) would be worth more than Uber if the IPO goes ahead at the sort of valuations being floated with even VW ($83bn) being pushed into the hard shoulder.

At $120bn Uber would be worth as much as GM ($45bn), Hyundai ($40bn) and Ford ($35bn) combined.

What does this tell us about how the market views the legacy car companies? After a 130-year reign, the internal-combustion engine looks set to be displaced as the premier transportation technology.

A combination of automotive technologies; electric and hydrogen engines, driverless cars and ride-sharing; along with growing fears about the environmental impact of carbon emissions look set to displace petrol and diesel from their historic perch. If, or more likely when, this happens the internal combustion engine will go the way of the horse and buggy.

Will the legacy car manufacturers be nimble enough to make the transition to these new green transportation technologies or will they be displaced by newcomers such as Tesla (market value $45bn)?

At the relative valuations implied by the proposed Uber IPO the market is betting that they won't.

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