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Dividends and falling revenues take gloss off Eir's profit growth

Richard Curran


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French billionaire Xavier Niel has witnessed a mixed financial performance since taking control of communications company Eir. Photo: Bloomberg Finance

French billionaire Xavier Niel has witnessed a mixed financial performance since taking control of communications company Eir. Photo: Bloomberg Finance

French billionaire Xavier Niel has witnessed a mixed financial performance since taking control of communications company Eir. Photo: Bloomberg Finance

The jury is still out on whether French billionaire Xavier Niel got a bargain or not when he bought a controlling stake in Eir. As the telco announced half-year results during the week, on the surface everything looked good. But below the water line, there is a lot more work going on to maintain earnings growth at the former State monopoly.

First, here is the good stuff from the surface. Eir reported a 3pc increase in earnings (ebitda) to €287m in the six months to December 2019. Bear in mind this is nearly €50m more in ebitda than the company reported for the same period in 2017, before Niel took control. Eir's big capital expenditure on fibre-to-the-home continues, with 455,000 homes passed, and an increased take-up rate of 38pc. Mobile earnings grew.

In Niel's time, the firm has exited the bogged-down National Broadband Plan, has settled a long-running dispute with ComReg, cut costs, and continues to invest. This is all good stuff, under the stewardship of chief executive Carolan Lennon.

But below the surface, none of these things have come easily. Revenues in the first half of the year fell €17m to €617m. In revenue terms, Eir remains a shrinking business, with revenues having fallen from €638m for the same period two years earlier.

Earnings growth is being hammered out largely through cutting costs. If you make a bigger profit by taking in less money, you have to be smashing costs. But this cannot continue into the long term. Non-pay costs were cut by a sizeable 23pc to €108m in the six months to last December.

Eir is achieving lower levels of customer churn in its mobile business, which is good, but its average revenue per user fell. It seems that competitive pricing is paying off.

However, ebitda at its fixed-line business, which generated €241m of its total €287m in earnings, fell. If you look below the earnings level, you have a business generating around €617m of revenues in six months, but turning out a pre-tax profit of €44m on it.

Current management have been adept at squeezing costs out, while shareholders are happy to invest through capital expenditure for the future, as Niel has done with Iliad, his listed French telco. But over at Iliad, investors have not been impressed and Niel increased his holding through a €1.3bn share placing and buyback, following a poor share price performance. Minority shareholders at Eir were beneficiaries of a €400m dividend early last year, funded largely through debt refinancing. None of this went to Niel.

However, Eir's accounts show that in the three months to December 2019, a further dividend of €80m was paid to "equity shareholders". This payout, together with the repayment of a credit facility of €100m, contributed to a €157m reduction in net cash in the company's coffers.

When Niel and Iliad took a controlling stake in the business, it valued Eir at €3.5bn, including debt. Net debt at the end of December was still around €2.5bn, following decent growth in earnings, but €480m paid out in dividends after debt refinancing.

Niel may well have laid down the foundations for a decent long-term return at Eir, but he might have to wait a while before availing of it.

Housing challenge for new govt cannot be underestimated

It can be very difficult to get a handle on what is really going on in the housing market. It clearly remains dysfunctional, but is it getting better or worse? There can be too much confusing data about rents, sale prices, new-builds, cuckoo funds, planning permissions and everything else.

The Construction Industry Federation (CIF) produced one of the most interesting pieces of research in the week. It said that of the 21,000 new homes built in Ireland last year, only about 8,000 were offered for sale.

It said the State acquired at least 4,400 for social housing and investment. This was made up of local authorities receiving 2,229 homes through Part V planning requirements, and the State bought or leased a further 2,163 new dwellings for social housing.

The CIF says investment funds bought 95pc of the 3,644 apartments completed last year. The remaining 5,000 or so homes were one-off houses, built by the owners and never offered for sale. Put together, it paints a picture of slow progress on social houses, and very little progress for those interested in buying a new home or apartment.

If you cannot land a mortgage and buy a house at current prices, and you do not qualify for social housing, you really are banjaxed. Government initiatives are either too late when it comes to rent controls, or too little when it comes to affordable housing. The Land Development Agency (LDA), set up a year and a half ago, still lacks underpinning legislation to allow it to go about its remit.

The LDA is attaching itself to a large number of social and affordable housing schemes but they remain at very early stages. Only one of the projects listed on its website has even had a planning application submitted.

Hundreds of potential homes are being shot down at the planning stage, at times with the support of local politicians. Yet developers like Cairn Homes, with good sites, a good track record and plenty of finance, are doing share buybacks for investors rather than ploughing ahead full-steam.

This may reflect a lack of capacity to build any more projects at once, or simply a plan to alleviate concerns about a housing market that is in need of a correction.

There are signs of a big softening of property prices at the top end of the market, especially in Dublin. However, if someone came along and built a large number of affordable houses, they would be snapped up by eager punters. Whoever forms the new government will have to throw a lot of money at housing. But there are real question marks about whether lack of money is the problem.

Capacity constraints, developers sitting on sites, not enough skilled workers at realistic cost, and a reluctance by local authorities to get involved in building social housing are all contributing factors. The sector will remain dysfunctional for some time.

UK's immigration policy is ripe for a low-key row-back

So Boris has pulled up the drawbridge on cheap immigrant labour after Brexit. Businesses are worried that they won't be able to access low-price, low-skilled labour in a few years. This is a real problem in particular sectors, from health and hospitality, to food and agriculture.

However, perhaps Johnson is preparing to quietly row back after making the big announcement. He has left the door open to exceptions where there are real issues in certain sectors. That list of sectors could quietly grow in the years ahead, and many might not notice the steady row-back.

Investors weren't that worried. Dalata, which has several hotels in the UK and is building more, didn't see any share price dip. Neither did sandwich maker Greencore.

British home secretary Priti Patel said businesses should respond by investing in automation.

Of course, automation is coming anyway to many of these industries, but accelerating it would just mean fewer people working at all - whether they are British or from anywhere else. Good luck with that, Priti.

Sunday Indo Business