Indications are good for ICG and Jurys

Despite setbacks from foot-and-mouth and the September 11th attacks, these stocks started their recovery late last year and there is still the potential of upward re-ratings.

Just over a year ago the Irish economy was enduring the negative effects of the foot- and-mouth crisis. At the time, most analysts took a relatively sanguine view of the likely impact on the overall economy. The tourism sector was hit particularly hard, as were some sectors of the food industry.

Nevertheless, the economy as a whole came through the crisis virtually unscathed and is testament to the fact that the Republic is now a highly developed economy.

There is a small number of companies quoted on the Irish stock exchange that are exposed to the tourism and transport sector, including Ryanair, Jurys Doyle Group and Irish Continental Group. Ryanair's fortunes now depend on the broader European marketplace and the impact on its business of the foot-and-mouth scare was minimal.

In contrast, ICG and Jurys Doyle are heavily dependent on the Irish economy and, in particular, the tourism sector. ICG operates passenger ferries and freight vessels between the Ireland and Britain, and Ireland and continental Europe as well as operating the Dublin Ferryport terminal.

On a geographic basis, 40 per cent of the group's profits are generated in the Republic, although this probably understates the degree to which the company is dependent on the Irish economy. The movement of freight is critical to ICG, so the volume of imports and exports into and out of the Republic is a major factor in growth in demand for the company's services.

The foot-and-mouth crisis came at a bad time for the company as it grappled with loss of revenue caused by the abolition of duty-free sales and increased fuel costs. Duty-free sales were an important revenue source for the group and it has taken time to compensate for this lost revenue through higher fares. Over this period, the company was also investing heavily in new capacity and took delivery of the Ulysses, which represented a major addition to capacity. ICG's fleet-replacement programme was completed in 2000, leading to an annualised capacity increase on its main routes of 60 per cent.

The group's earnings fell sharply in 2000 and 2001 as a result of these adverse factors, although a strong recovery is forecast for 2002. The share price had been weak prior to the foot-and-mouth crisis and it declined further as passenger traffic on its ferries fell sharply.

However, the latter part of the year saw a modest recovery and, so far this year, the price has risen further, as confidence has returned to the Irish economy. In particular, demand for the company's freight services has grown, reflecting a robust Irish economy.

A further medium-term factor benefiting ICG is that ports in the Republic have been gaining business at the expense of ports in Northern Ireland. The extra capacity that ICG has added to its fleet should enable it to continue to capitalise on this trend.

The Jurys Doyle Group also experienced a sharp sell-off in its share price during 2001. The foot-and-mouth crisis had an obvious impact but this was followed by the contraction in American tourists following the September 11th terrorist attacks.

After hitting a low point in late September, the share price recovered steadily in the final months of 2001. In response to better economic news from the US, combined with improving European sentiment, the share price has now risen by approximately one-third since the beginning of the year.

Jurys Doyle operates both high-quality and mid-market hotels in city-centre locations in the Republic, Britain and, to a lesser extent, the US. Its focus for expansion is on the mid-market sector through its very successful Jurys Inn brand.

Despite the strong year-to-date share price performance for both of these companies, they are still reasonably valued compared with the overall market and compared with their international peers. The prospective price-earnings ratio (PER) for Jurys Doyle is 13, while ICG's PER is approximately 10. In both of these sectors company comparisons are difficult, given the unique nature of various companies' franchises.

As would be expected, the large international competitors are rated far more highly. For example, in shipping, P&O is trading on a PER of 16, while the Hilton Group is trading on a PER of 19.5.

These comparisons indicate that there is still some potential for an upward re-rating in the share prices of both companies although any re-rating will be dependent on continuing strong growth from the Irish economy.