Thursday 24 May 2018

Irish firms in the firing line over sterling exposure

Ryanair has already had to lower its profit guidance, and they're by no means the only ones affected, writes Gavin McLoughlin

'We would caution that this revised guidance remains heavily dependent upon no further weakness,' said Michael O'Leary Picture: Niall Carson/PA
'We would caution that this revised guidance remains heavily dependent upon no further weakness,' said Michael O'Leary Picture: Niall Carson/PA
Gavin McLoughlin

Gavin McLoughlin

Ireland's brashest company cut a humbler tone this week in lowering its profit guidance.

Sterling has been plummeting and Michael O'Leary's Ryanair is feeling a pinch. The airline has lowered its full-year net profit guidance from a range of €1.375bn-€1.425bn to a range of €1.3bn to €1.35bn, saying the pound's drop was going to lower its income from fares in the second half of its financial year. "We would caution that this revised guidance remains heavily dependent upon no further weakness," O'Leary said.

It's not the first ISEQ giant to caution investors on currency fluctuations. At its half-year results in August, Kerry Group told investors to expect growth in adjusted earnings per share to come in at the lower end of previous guidance due to "increased currency headwinds". Since then those headwinds have increased further.

Merrion Capital's Irish equity analyst Darren McKinley expects "a continued trend of Irish companies having to lower their forecasts as a function of their sterling exposure".

"We would expect a continued trend of companies highlighting a lack of visibility in terms of the outlook, because they don't know what the outlook is going to be after Article 50 is triggered," McKinley adds.

In its second-half outlook published in July, Merrion compiled a list of Irish equities with significant exposure to the UK. With a full quarter completed since the Brexit referendum, it's in upcoming results that currency weakness is really going to start to bite. After Ryanair's announcement, what other companies face a hit when translating profits denominated in the falling pound?

Bulmers maker C&C was ranked second on Merrion's list. In a trading statement issued around a fortnight after the Brexit vote, the company - which has a had a bit of a rough ride since its entry into the United States - said almost half of its profits were denominated in sterling and reported in euros.

"C&C is exposed to the translation impact of a devalued pound. At current levels, if sustained, currency movements have the potential to undo the earnings benefit from both cost reduction activity and the steady progress made in trading year-to-date," the statement said.

As of Friday a pound buys about four fewer cents than it did when that statement was put out. Half-year results due on Thursday should make very interesting reading.

Another stock to watch is Ireland's largest hotels group Dalata, which has something of a natural hedge given that a weaker pound should help get more tourists into its UK hotels.

The second-best-performing share on the Irish Stock Exchange last year is down around a quarter year to date, falling sharply to as low as €3.40 in the aftermath of the referendum before rebounding to €4.18 as of Friday afternoon. Insiders including chief executive Pat McCann and his deputy Dermot Crowley have been buying shares of late.

"Sterling weakness has had a negative impact on the 'euro translated' earnings from our UK hotels and this impact has increased since date, we have not seen any impact on trading at our hotels but we are monitoring booking levels closely," McCann said in a statement at the beginning of last month. Merrion upgraded the stock to a 'buy' earlier this week - saying concerns around currency impacts were overdone.

Over at Fyffes, David McCann has been looking to hike prices as a result of the currency movements.

The banana importer faces a struggle because of the weakness of sterling and euro versus the dollar (in which it buys fruit). A couple of acquisitions in the Canadian mushroom industry should bolster earnings, the company has told the market. Will McCann be able to put the failed Chiquita merger firmly behind him?

Bank of Ireland saw its share price bashed after the Brexit vote. Around 40pc of its loan book is in the UK, so quite aside from the risks of currency translation, there's also a risk that non-performing loans could tick upwards if the UK economy runs into difficulty. About a fifth of the bank's profit comes from the UK.

In interim results issued in late July, chief executive Richie Boucher said it was "too early to fully assess the impacts of the United Kingdom's EU referendum result on economic and customer activity".

Another company that had a post-Brexit battering was Kingspan, but a stellar set of half-year results helped the share price recover from as low as €18.09 in early July. By the end of August, the building materials firm was trading above pre-referendum levels. The company has been active in expanding its presence in various markets around the world but the UK remains an important part of its business.

"Exchange rate movements are obviously a big factor, in particular, when it comes to the translation impact of a weakening sterling for Kingspan," chief executive Gene Murtagh told analysts in August. But he also said overall order intake was up 7pc in the UK year-on-year in the period from June 30 to August 12 - an encouraging sign.

Merrion's McKinley says that with the Irish market having underperformed the global market in the year to date, some stocks have seen the worst-case scenario priced in on foot of Brexit. There's value out there for stock pickers, he reckons.

"We are actively seeking out opportunities to add to stocks with some UK exposure but not sufficient enough to de-rail the group outlook.

"Post the ECB meeting this week, bond yields and the euro have continued their downward trend. Investors may reallocate money toward European countries with higher than average levels of debt and that are export-focused. Ireland falls into both these categories."

Sunday Indo Business

Business Newsletter

Read the leading stories from the world of Business.

Also in Business