Irish firms slow to blame Brexit for weaker outlooks

There’s no getting away from the B-question.

A raft of Irish companies with large UK exposure, from C&C to Grafton and Greencore, have been out in the market in recent weeks with trading statements and results.

All had been prepared for questions about Brexit, but investors hoping for a clear response have been left largely disappointed.

While a raft of UK-based companies from Aer Lingus's parent IAG and EasyJet to London real-estate agents Foxtons and retailer Sports Direct have wasted little time in saying Brexit ate their earnings outlook sums, Irish plcs, aside from Grafton Group, have been slow to say it was the UK decision to quit the EU "wot done it". So far, at least.

"The favourable macro-economic environment seen for much of the first half of 2016 will have provided a supportive backdrop for Irish corporate earnings during that period. While the sharp post-Brexit move in the euro-sterling exchange rate is a near-term headwind, it is too early to assess what the longer-term economic impact of the vote will be," said Philip O'Sullivan, an economist with Investec in Dublin. "But some of the surveys coming out of the UK in the recent weeks are unsettling."

Significant risks

Britain is Ryanair’s largest market, accounting for almost 40 million passengers and 28 per cent of its revenues. Chief executive Michael O’Leary surprised the market on Monday by sticking to his full-year forecast that profits would rise 12 per cent to €1.375 billion to €1.425 billion, particularly in light of profit warnings from IAG and EasyJet.

But O’Leary said he “would caution strongly that post-Brexit there are significant risks to the downside” for its forecast.

"Brexit came as both a surprise and disappointment to Ryanair, " O'Leary said. "We think we're heading for a period of considerable political and economic uncertainty in both the UK and the European Union. In the near term, we expect that Brexit will lead to weaker sterling, slower [gross domestic product] growth in the UK and the European economies, downward pressure on fares until at least the end of 2017."

C&C, which generates almost half its profits in the UK, three weeks ago became the first company on the Iseq to have to give an assessment of the post-Brexit world as it faced shareholders at its annual general meeting.

The cider and beer maker warned that a plunge by sterling against the euro since the UK vote has the potential to undo the benefit of its robust trading performance at the start of its financial year and the company’s cost-cutting efforts.

Analysts, on average, have cut their full-year net profit forecasts by almost 5 per cent for C&C in the past four weeks.

Still, the group's chief executive Stephen Glancey has found a few silver linings in Brexit. Sterling weakness may make potential UK takeover targets cheaper and the group's brewery in Glasgow may win more beer-making contracts from domestic companies that would have imported up until now, he said.

Sterling has fallen about 9 per cent to €1.18 since the UK referendum.

The move by a number of Irish companies in recent years to report in sterling, as they transferred their main listing to the London market, has delivered an unexpected currency-driven earnings boost. A similar story is playing out among some of the FTSE 100's big exporters such as Guinness-owner Diageo, drugmaker GlaxoSmithKline, British American Tobacco and major oil groups.

Currency benefits

Dublin-based DCC, whose businesses span fuel distribution to waste management, said its sterling-denominated full-year results will benefit from the currency’s weakness as it generates half its profits outside the UK.

The company, which joined the FTSE 100 in December, said that Brexit would have little material impact on its business as it does relatively little cross-Border trade.

But currency benefits aren’t much of a cushion for Irish companies that report in sterling and have most of their business in the UK. Just ask Grafton Group, the builders merchanting and DIY company.

The company behind Woodie’s in Ireland said growth in its UK merchanting like-for-like sales, which make up more than 70 per cent of group revenues, slowed dramatically over the course of the first six months to turn negative in June as the UK took to the polls.

"One assumes that's persisted in July," said Gervais Williams, managing director of London-based investment firm Miton Group.

Grafton said Brexit has created uncertainty about the near-term outlook and prospects for the economy, which is likely to weigh on demand for new housing and the repair, maintenance and improvement market for the remainder of the year.

With most economists predicting that the UK will fall into a recession in the coming year – or at best narrowly avoid it – some 0.5 percentage points may be shaved off Irish GDP, according to Minister for Finance Michael Noonan, slowing growth to 3.4 per cent, from about 5 per cent this year.

Europe’s largest investment bank Deutsche Bank estimates the economy here could decelerate at an even faster pace, to 2.9 per cent, which would hit the domestic earnings of Irish plcs.

The problem, for now, is that companies and analysts are stabbing in the dark.

“Both in the short-term and in the longer-term, the economic impact of Brexit on Ireland is set to be negative and material,” the Central Bank said on Wednesday. “In the transition period to establishing new arrangements between the UK and the EU, there is the potential for a protracted period of heightened uncertainty and risk aversion.”

Already the clouds are gathering, according to Williams. Last week, a UK purchasing managers survey indicated that business activity had contracted sharply in July – as new orders plunged.

A Bank of Ireland consumer and business sentiment index fell almost 10 per cent between June and July, as households took a dimmer view of their financial situation and firms pared back hiring plans.

Profit warning

For a read on where the wider European is headed, few Irish-based companies should offer the perspective of Smurfit Kappa, the cardboard box-making giant whose prospects are closely tied to GDP.

While the company said the direct impact of Brexit is limited (Britain and Ireland account for less than 11 per cent of sales, according to its 2015 report), it said it could be “into the latter part of the second half” before it has any sense of the impact on activity.

For Williams at Miton, the overall corporate earnings face many risks in the near term.

“I think there’ll be a slowdown, a consumer recession [in the UK],” he said. “I worry, too, about the lack of growth in Europe, terrorism risks and [the economy of] China.”

But given the haste with which EasyJet came out with a profit warning within days of the UK referendum, the B-word is likely to be used to justify any setback, he said.

“It may just become a convenient scapegoat for corporate to explain weak earnings.”