Wednesday 17 January 2018

Foreign fields are greener for Irish companies as economy stays flat

Big food businesses and building materials firms are exports stars but our sick banks are still a major drag writes George Garvey

Most of Ireland's leading quoted companies have now published their half-year results. With the exception of the banks, most of them overcame a depressed domestic economy to deliver an improved performance.

With the interim results season now drawing to a close, what are the common themes, if any, to emerge? The picture painted by the interim results is very much one of the banks and the rest.

While all of the remaining Irish-owned banks continue to inhabit the intensive care unit, most of the other Irish quoted companies reported improved half-year results.

The interim results from AIB and Irish Life & Permanent weren't so much bad as absolutely awful. Loan losses at AIB reached €2.96bn in the first half, up from €2.26bn a year earlier.

This led to an underlying loss, when the paper "profit" on the forced redemption of subordinated capital is excluded, of €3.01bn, up from €2.88bn the same time last year.

If possible, things are even worse at IL&P. Its profitable life and pensions arm Irish Life is now up for sale, which means that the bancassurer is set to be broken up with its troubled Permanent TSB mortgage bank almost certain to be subsumed into one of the two "pillar" banks, AIB or Bank of Ireland.

Its half-year results were truly dreadful with loan losses jumping from €150m to €333m while its underlying loss, excluding redemption "profits", soared from €133m to €393m.

Things were slightly better at Bank of Ireland where losses on non-NAMA loans fell from €1.08bn to €842m and the underlying loss dropped back from €1.32bn to €723m.

With a group of international investors having agreed to pay €1.12bn for a 35pc stake, not alone has Ireland's oldest bank managed to avoid majority state ownership, it is now in a position to poach business from some of its even worse-strapped competitors.

However, even for Bank of Ireland the unresolved issue of mortgage arrears remains a dark cloud on the horizon.

With the Irish-owned banks having more than €100bn of residential mortgages on their balance sheets, of which Bank of Ireland alone has €28bn, the €10bn being provided for mortgage writedowns in the most recent bank stress tests looks very optimistic.

However, it hasn't been all bad news for the banks in recent months.

"Getting Wilbur Ross and the other investors on board at Bank of Ireland was a positive, as was the sale of Anglo's US loan book", according to Joe Gill, head of equity research at stockbrokers Bloxham.

However, he remains pessimistic about the banks' future prospects. "Bank of Ireland owned by Barclays and AIB owned by HSBC wouldn't necessarily be a bad thing. It would slash funding costs and make it much easier to attract deposits", he says.

That's the bad news. The good news is that, apart from the banks, most of Ireland's major quoted companies are doing very nicely thank you very much.

The stars of the show at the half-year stage were undoubtedly food companies Kerry and Glanbia.

After a few years of sluggish performance it is now clear that Kerry has recovered its mojo under chief executive Stan McCarthy with trading profits up 11.3pc to €470m in the six months to the end of June.

The Tralee-based group is also in exclusive discussions to buy US food giant Cargill's flavourings arm, a move which would further strengthen Kerry's global flavourings business.

Food companies

Glanbia, the other major quoted Irish food company, also had an excellent first half, with its operating (pre-interest) profits leaping by 44pc to €95.6m. Both Kerry and Glanbia are among the major beneficiaries of soaring global food commodity prices.

But what about the other major Irish quoted companies reporting their half-year profits? How did they perform without the aid of higher commodity prices?

Apart from the banks, no sector of the Irish economy has suffered as badly from the post-Celtic Tiger hangover as the construction industry. So how have the quoted Irish building materials companies been faring? Much better than one might have thought.

With annual sales in excess of €17bn, mighty CRH is by far Ireland's largest industrial company. With most construction activity occurring in summer it traditionally reports the vast bulk of its profits in the second half of the year.

Even so, it announced a near-quadrupling of first-half profits to €95m from the same period last year. Working in CRH's favour were the better weather during the first half of the year and the fact that a mere 2pc of its sales now come from the chronically-depressed Irish market.

Kingspan also delivered a much better set of first-half results, with sales jumping by a third to €736m and operating profits up by 26pc to €41.7m. Like CRH, Kingspan has diversified away from Ireland, with just 5pc of its sales coming from the domestic market.

Grafton, the other major construction-related Irish quoted company, also reported an improved first-half performance, with sales increasing by 3pc to just above €1bn and operating profits going up 43pc to €21m.

Once again Grafton has been diversifying away from the domestic market, with the proportion of sales coming from Ireland falling from 29pc to 26pc. Chairman Michael Chadwick must be looking longingly at the single-digit Irish sales percentages of his main rivals.

"The common denominator in the first-half interim results has been the continuing weakness of the Irish economy. Most of the non-financial companies have tried to work around that by investing internationally", says Mr Gill

Diversifying away from the Irish market is more difficult for the other major Irish quoted companies reporting interim results -- Aer Lingus, Independent News & Media and Irish Continental Group.

The Aer Lingus first-half results were distorted by the industrial action by cabin crew early in the year. This meant that first-quarter operating losses at the airline actually increased from €37.8m to €53.7m.

However, Aer Lingus came storming back in the second quarter with operating profits jumping from €18.8m to €25.9m. The improved performance at Aer Lingus was due to it restricting capacity. This allowed it to push up its average first-half fare from €98.66 to €106.94.

Aer Lingus wasn't the only quoted Irish transport company to experience a difficult first half. Ferry operator Irish Continental also suffered from higher oil prices and the absence of the Icelandic ash cloud, which boosted its results in the first half of 2010, resulting in a 26pc decline in operating profits to €6.5m.

Independent News & Media, the publishers of this newspaper, also felt the impact of the depressed Irish economy, with underlying advertising revenues declining by 7.3pc.

However, INM is the only major Irish print media publisher to remain profitable.

And then there is FBD. The farmer-controlled insurer has determinedly ploughed its own furrow down the years.

The first six months of 2011 were no exception, with operating profits more than doubling from €11.3m to €28.7m. Just for good measure, the interim dividend was increased by 7pc to 11.25 cent per share.

At a time when bank dividends are a rapidly receding memory, FBD is one of the few Irish financial services companies returning cash to its shareholders.

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