Monday 22 April 2019

Weather winners (and losers)...The firms making hay while the sun shines - and those feeling the heat

The best summer for 40 years has been great news for some firms but not others

After a torrid couple of years, the summer of 2018 has been just what the doctor ordered for C&C
After a torrid couple of years, the summer of 2018 has been just what the doctor ordered for C&C

Dan White

When the temperature is touching 30 degrees and the sun is beaming down what could be more refreshing than a cool drink? Throw in a World Cup and 2018 has been the kind of summer drinks manufacturers dream about.

After a torrid couple of years, the summer of 2018 has been just what the doctor ordered for C&C, which manufactures Bulmers/Magners cider in Ireland and Tennent's lager in Scotland. Speaking at the group's AGM earlier this month chief executive Stephen Glancy told shareholders that:

"In Ireland, good early summer weather has helped Bulmers return to moderate volume growth in the year-to-date. During the last year we invested an additional €3m behind Bulmers…. [this] helped the brand retain share in the off-trade and packaged on-trade channels. Heightened launch activity across beer and cider in Ireland means competition for taps in the on-trade remains intense."

The good weather certainly seems to have injected some fizz into what had previously been a flat C&C share price. From a peak of €4.76 in June 2014 it had fallen to just €2.60 by March of this year - a drop of 45pc.

Since then, rejuvenated by the good weather, the C&C share price has risen strongly and was trading at €3.50 last week, a 34pc rise on its March trough.

Of course, the good weather hasn't been the only thing putting a spring into C&C's step. Apart from the aforementioned investment in its Irish Bulmers brand, there was last April's acquisition of Matthew Clark Bibendum, the UK's largest independent drinks distributor. It has 23,000 mainly on-trade accounts including pubs, hotels and restaurants.

The only fly in the ointment was the introduction of minimum unit pricing of alcohol in Scotland at the beginning of May, which is likely to reduce off-trade volumes by up to 10pc. However, even this setback is likely to be at least partially offset by the good weather.

This means that, after a 6pc decline in volumes in the year to February 2018, C&C is set to return to volume growth in the current year with total cider volumes (all brands not just Bulmers) in the Republic of Ireland up 2.7pc in the period from March to May, according to market research firm Nielsen.

The WB Yeats vessel which is on order for Irish Ferries, at shipyard in Germany
The WB Yeats vessel which is on order for Irish Ferries, at shipyard in Germany

Another firm also likely to benefit from the good weather is fuel forecourt retailer Applegreen, which operates 155 fuel stations in the Republic and a further 77 in the UK. When the weather is good people tend to drive more and, as well as topping up their tanks, also stock up on other items such as coffee, soft drinks, ice creams and sandwiches.

For Applegreen, which had been buffeted by headwinds of the poor March weather and rising fuel commodity prices earlier this year, the extended run of good weather which we have enjoyed since mid-May is good news. However, any weather-induced benefit to the share price seems to be behind us.

The Applegreen share price, which started the year at €5.44 had hit €6.60 by mid-May, an increase of more than 20pc. However, it has since given up about half of those gains with the share price trading at €6.00 late last week.

Hotel operators have also traditionally benefited from good as weather as the sunshine prompts more people to take breaks. However, according to Pat McCann the boss of Ireland's largest hotel operator Dalata, it's not quite that straightforward. "The weather has not had too much of an effect, either positive or negative, on our business. We are more urban-based. Our business has remained constant."

While urban-based hotels have experienced little direct benefit, hotels and guesthouses in the traditional tourist areas are experiencing an increase in business due to the fine weather.

Two companies which should have benefited strongly from the fine weather are Irish Continental Group (ICG) and Ryanair as the unaccustomed sunshine encourages more of us to travel. Unfortunately for Irish Continental, which operates Irish Ferries, after a good first four months with revenues up 1.4pc, it has turned into a year to forget.

The first sign of stormy waters ahead came on April 21 when Irish Ferries announced that, due to the delay of the delivery of its new WB Yeats superferry until mid-July, it was cancelling 2,500 passenger bookings. Then on June 12 things went from bad to worse with the announcement of the delivery of the WB Yeats had been further delayed, until at least September and that a further 6,000 bookings were being cancelled.

Irish Ferries' annus horribilis continued with the announcement on June 26 that its Ulysses ferry, which operates on the key Dublin-Holyhead route, had developed "technical difficulties" and would be out of action for about a week. Unfortunately, after entering dry dock it quickly became clear that these "technical difficulties" were much more serious than had been originally thought and it was announced on July 9 that the Ulysses would be out of service "for a further period of one or two weeks".

With the unforeseen "technical difficulties" occurring at the height of the tourist season, Irish Ferries was unable to secure an alternative vessel. The company's observation that this was "the first major disruption on the Ulysses since her deployment on the Dublin Holyhead service in 2001" will have come as scant consolation to the affected passengers who have been offered a €150 voucher that can be redeemed against bookings for 2019.

Investors have also been unimpressed by events at Irish Continental. The share price, which peaked at €6.00 in mid-March was trading at €5.05 last week, a fall of more than 15pc.

Ryanair grew passenger numbers by 7pc to 12.6 million in June. This followed a 6pc rise to 12.5 million in May and a 9pc increase to 12.3 million in April. Ryanair has long since outgrown its Irish routes, with just 11pc of its 2017 revenues originating in Ireland meaning that the impact of the fine weather is likely to be marginal at best. The market is paying far more attention to the airline's ongoing industrial relations difficulties, the latest of which saw its Irish pilots walk off the job last Thursday with 30 flights being cancelled as a result.

Ryanair pilots picketed Dublin Airport last week.
Ryanair pilots picketed Dublin Airport last week.

Perhaps not surprisingly the Ryanair share price has barely tread water, up 3pc to €15.51 since the start of the year.

While drinks companies, forecourt retailers, ferry operators and airlines are all at least potential beneficiaries from a period of warm, dry weather, food and agribusiness companies tend to take a warier view of climatic extremes.

Glanbia, through its 40pc-owned associate Glanbia Ireland, is Ireland's largest dairy processor. Coming on top of a harsh spring, when many of them were forced to spend large sums of money on expensive feed for their cattle, Glanbia's supplier-shareholders have seen their milk price cut in both April and May.

As these supplier-shareholders still control at least 31.5pc, in practice probably considerably more when individual farmer shareholdings are taken into account, of Glanbia PLC as well as 60pc of Dairy Ireland, Glanbia has to move gingerly when cutting milk prices. Almost inevitably this means that the milk price is a lagging indicator with Glanbia having to absorb at least some of the pain from lower market prices.

With its supplier-shareholders already under financial pressure following the unseasonably cold spring, Glanbia Ireland has announced that it will increase its June base milk price by up to 2 cent a litre with Glanbia Co-Op chipping in another 1 cent a litre "drought-related support payment".

An extra three cent a litre will come as good news to the hard-pressed farmers but not so good for Glanbia shareholders who will end up meeting at least some of the cost. After performing poorly in the final quarter of 2017 and the first quarter of 2018, with the share price falling by 12pc as the poor spring took its toll, the Glanbia share price seemed to have bottomed out and it had recovered virtually all of its previous losses by early June. Since the it has been downhill all the way with the Glanbia share price falling by 3pc over the past month.

While a 3pc share price fall is of little significance by itself, the reversal of the April and May milk price cuts, and their likely cost, is likely to weigh on the Glanbia share price until more normal climatic conditions return.

Seed, feed and fertiliser firm Origin Enterprises' share price also took a severe battering in the first quarter of the year, falling by 17pc from €6.68 at the end of 2017 to €5.42 at the end of March 2018. This was despite reporting good half-year results on March 8.

In its trading statement for the nine months to the end of April, released on June 19, the group spoke of a "robust" third quarter performance following the poor winter and spring and stated that there had been a "positive" start to the fourth quarter ending this month.

As Origin makes most of its profits in the final two quarters of its financial year, ie from February to July, the bullish trading statement helped contribute to the recovery in the share price from its springtime lows. Origin shares were trading at €6.20 last week.

But will this recovery be sustained into the financial year beginning on August 1? Coming on top of the harsh spring, which delayed planting by up to two months in some parts of the country, the exceptional warm and dry summer is creating havoc for many tillage farmers with very little if any crop growth.

Unless we get lots of rain and quickly many of Origin's tillage farmer customers are facing the prospect of a complete wipeout in 2018. What impact that will have on the share price remains to be seen. Weather is by its nature cyclical. The dry warm summers of 2013 and 2014 were followed by the dreadful wet summers of 2015 and 2016. Normal climatic service will be restored.

In the meantime, the shareholders and customers of the affected companies can only hope that it happens sooner rather than later.

Sunday Indo Business

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