Future bright for Irish corporates
Corporate Ireland is on the march. With strong financial performances attained during 2014 companies have the resources and appetite to expand their operations globally.
Corporate Ireland is on the march. With strong financial performances attained during 2014, and equipped with solid balance sheets and access to inexpensive debt, companies have the resources and appetite to expand their operations globally. This sets the stage for a period of acquisition led development.
Industrial companies in Ireland are reporting their 2014 results currently and, in general, these are robust and encouraging.
Growth in profits, cashflows and dividends are all markers of a year when progress was made in various markets around the world.
A combination of better economic fortunes and self-help measures by companies (through restructurings or efficiency improvements) has delivered a sturdy aggregate set of financial results from corporates engaged in construction, packaging and agri-food markets among others.
This platform sets the stage for further growth in 2015. The opening macro economic factors are encouraging.
Economic growth in key geographic markets such as the UK and US is evident already in the current year. Currency movements, dominated by US dollar and Sterling strength relative to the euro suggests translated profits will rise in 2015.
Moreover, transaction benefits from exporting out of Irish factories to Britain and America will also accrue due to more competitive FX rates.
Finally, debt servicing costs continue to fall.
This all means the financing costs of existing debt are less burdensome while the availability of low-cost borrowings make the funding of growth more appealing.
From this starting position management teams will be contemplating the option of acquisitions to propel growth.
That view will be emboldened by the strong balance sheets across corporate Ireland, a function of prudent and conservative debt management.
Already, we have seen this year companies including CRH and Kingspan announce key acquisitions that drive their global footprints and it is it probable other companies will follow suit.
We look at measures including net debt to EBITDA (Earnings before interest, tax, depreciation and amortisation) to weigh up the financial rigour of any company. Many stockmarket listed Irish businesses have debt to EBITDA multiples materially below 2x which implies they have plenty of headroom.
With debt costs as low at under 2% for the best Irish companies the appeal of acquiring other companies is rising.
Imagine a business with €100m of sales and €5m of profit, representing a typical 5% margin. If that company was acquired with 100% debt that cost 2% in interest then the acquiror’s profits would be boosted by €3m per year.
Of course many other factors come in to deciding on acquisitions, and equity would normally be included in any consideration, but this example underlines the attraction of acquisition led growth presently.
Companies will look for businesses that make financial sense but ones that also matter strategically. Adding a new product line, bulking up scale or providing rationalisation opportunities are also inputs built in to an acquirer’s calculus.
In addition, the deal has to be able to demonstrate an ability to produce returns on capital that exceed its cost of capital, a classical way of measuring wealth creation.
I expect we will see a number of acquisitions undertaken by Irish companies as 2015 unfolds.
These will help grow the scale of the corporates, widen their international footprints and broaden the product ranges they produce and sell.
If well managed they will also reward their shareholders through a combination of higher profits, rising dividends and enhance equity value creation.
These are the type of things us stockmarket anoraks enjoy – companies that display an appetite for growth, management teams that think strategically and an ambition to plant the Irish corporate flag on every corner of the planet.
It is a path that has been well worn by industrial companies managed from Ireland and hopefully that template will be repeated in the years ahead.
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