Irish listing makes sense

A view being stoked by global investment banks that being quoted in Ireland is the problem is complete bunkum

WHY DO management of some companies think being listed on the Irish Stock Exchange is a problem?

We are very good at beating ourselves up, and we have a great ability to overdo it when we convince ourselves that being Irish is at the core of our problems.

Over the last number of months there have been serious rumblings among executives and directors of quoted Irish companies, that being quoted on the Irish Stock Exchange has led to share price underperformance; that this situation will prevail for the long term; and that if they could find a mechanism to be included in one of the FTSE indices then all these problems would go away.

This view is stoked by global investment banks that see an opportunity to win business by scare tactics. A recent report by a large investment bank listed as a risk factor for an Irish company that it is listed on the ISEQ.

The underlying premise that being quoted in Ireland is the problem is complete bunkum.

The attached table looks at a cross-section of different Irish companies in different industry groups and compares them against the most relevant peer companies in the UK, Europe and the US. There is no clear pattern in how the Irish companies are valued against international peers; some trade at a premium, some at a discount, and some in line.

If being listed in Ireland was a systemic negative then you would expect a high proportion of these companies to be undervalued against their peers.

Unsurprisingly, the companies with low relative ratings are the ones that have a high percentage of earnings coming from Ireland, and the market, being efficient, understands that this is not a great place to be doing business at the moment. And yes, some companies are doing okay with their Irish businesses and may be unfairly punished, but sentiment towards all things Irish is at an all-time low for very obvious reasons.

So, for the moment, there is a broad brush of negative opinion towards all Irish earnings.

Is this a situation that will prevail for the long term? Well, no. Market sentiment is always on a pendulum and the only thing one can be sure of is that sentiment shifts. Many quoted Irish companies have grown market share through the recent downturn and when the economy is deemed to have stabilised sentiment will shift towards a story about recovery in Irish profits, and increased market share leading to increased margins.

Thankfully, markets are discounting mechanisms and this improvement in share prices will come long before the recovery in profits has fully taken hold.

The opinions that really matter are those of institutional investors who ultimately determine stock market valuations. In a recent article, entitled Star Managers see Value in Battered Ireland, three highly regarded London-based investors said they were running overweight positions in Ireland because of the quality of companies listed here, and because current negative sentiment had created great buying opportunities.

The third point, that “if only we could get included in a real index like the FTSE 100 or 250 then all our problems would be over”, really needs rebutting. The advantage of being included in any index is that there are large global funds which have performance measured against these benchmarks that will now consider ownership. However, only a tiny percentage of these funds have to own shares because they are in an index (these are known as passive funds). A stock moving in and out of an index can drive once-off activity by these funds, but any kind of permanent uplift in valuation is always driven by an active fund manager as the marginal buyer. These active managers choose whether they buy one share over another, and control significantly greater pools of funds than their passive colleagues.

They will make rational investment decisions based on myriad factors such as whether they like the industry the company operates in, the geographical location of earnings (there’s that Irish economy point again), earnings growth, market sentiment and a host of other factors.

The only way index membership is considered by them is that non-inclusion may preclude them from owning a stock.

Ask a corporate executive why he would want to be part of the FTSE 250 and he will tell you that it would result in more UK institutions owning the stock. That is correct, but the stock is already owned by institutions; some UK, some US and some continental European. Dropping a euro quote to chase the holy grail of FTSE inclusion would require some of these existing shareholders to sell their shares. So why should exchanging one group of shareholders for another lead to implicitly higher valuation?

I always struggle with the argument that UK institutional investors are somehow “better owners” of companies than US or continental European fund managers.

Most Irish companies have a heavier concentration of ownership by US funds than similar sized UK companies. Indeed, the valuation gap between UK and US companies operating in the same industry sector would suggest that US, not UK, institutions should be the investor base of choice.

An intriguing proof of this comes from Ryanair, as its ordinary share which trades on the ISE/LSE trades on a significant discount to its ADR listed in the US. This technical anomaly arises because US investors are prohibited from buying its ordinary share, and although the ADR entitles the owner to the same stream of profits, US investors consistently pay a higher price to earnings.

Delisting from Ireland may undermine the ability of Irish stockbrokers to be advocates for a particular company with their international clients. Would losing the support of Irish institutional brokers who spend their days primarily promoting Irish companies to a global audience add anything to valuation?

Would UK brokers jump into action to promote relatively small Irish companies in an unattractive economic environment?

Brokers write research on stocks they can generate commission from. UK brokers are not restricted in writing research on Irish companies. In many cases, they choose not to because they don’t see the commercial benefit of doing so. There are other factors too.

A company with disparate businesses will not be as appealing to an analyst as one which is a “pure play” on a theme or industry.

Irish companies that currently have the least UK broker coverage are those that have income streams from diverse sources.

None of this would change if the hurdle of index inclusion could be overcome.

Unsurprisingly, those that have the most coverage are typically stocks that fit the profile of high growth, and a simple thematic story.

Paddy Power, a darling of the gaming and leisure sector, has over 10 UK and global brokers writing research on the stock; it trades at a dramatic premium to its slower growing UK competitors, and it is not in a UK index.

Advisers who should know better tell Irish companies they should “seek a primary listing in London” and downgrade to a secondary in Dublin, to maintain its existing shareholder base. This suggestion displays an inherent lack of knowledge about the existing listing status of Irish plcs, and what is required to get a company into the FTSE indices. Most Irish companies have a dual-primary listing in Ireland and the UK and it does not matter a whit for FTSE index inclusion. There are two ways into an index; to be incorporated in that country and automatic inclusion follows or to apply to the FTSE nationality committee for reclassification as a UK national, where certain tests are applied.

Most Irish companies would not qualify under these criteria. Even if they did, the price for inclusion would most likely be a delisting from Ireland, with the full consequences of losing its euro quote, and destabilising its existing shareholder base. It may make sense for some companies to look at their listing arrangements because of significant corporate events, but for most there is no evidence any tangible benefit would accrue.

Myles Lee, chief executive of the largest stock quoted in Ireland, CRH, said recently it is listed in Dublin, London and New York; he finds value in all and has no reason to change. Wise words. If it ain’t broke, don’t fix it.

Linda Hickey is head of corporate broking at Goodbody Stockbrokers