All aboard Irish Continental

Ireland's improving economic fortunes along with its buoyant tourism industry are driving demand for Irish Continental's freight and passenger ferry services. The IMF forecasts that Irish economic growth will come in at 3.5 per cent in 2015 and 3 per cent next year, with much of that led by exports.

In the first four months of this year, Irish Continental trebled its cash profits to €10m (£7.1m) from €3m in the corresponding period in 2014. While the first half is normally a quiet period for the group, and the first four months only tend to generate 15 per cent of full-year profits, such a strong start to 2015 nevertheless bodes well.

The Irish freight market started to return to growth in 2013 and volumes of roll-on, roll-off freight in the first four months of the year increased 11 per cent. Meanwhile, cars were up 8 per cent over the same period and benefited from the promotion of "own car" tourism in Ireland. This momentum is not likely to suddenly fall away given the positive macroeconomic backdrop.

A large fixed cost base should mean rising revenues have a magnified effect on profits. And the group is benefiting from a number of tailwinds beside the improving economy. These include lower fuel costs, which fell 1.6 per cent in the first four months of the year to €74.8m - and recent oil price weakness should continue to exert downward pressure. Trading is also benefiting from the recent addition of a new boat, Epsilon, to Irish Continental's fleet. And comparisons between 2015 and last year should look favourable as the company had to shoulder €3m of start-up costs associated with Epsilon in 2014. The strengthening of the pound against the euro should also have a beneficial effect on revenue from tickets sold in the UK, although the effect on profits will be partially offset by the fact that about 15 per cent of Irish Continental's cost base is sterling-denominated.

One recent area of weakness for the group has been its container business, where freight volumes were down 1 per cent for the first four months to 100,000 containers. However, things could be looking up here, too, as the company has recently secured the services concession for the container terminal at Victoria Terminal 3 in Belfast Harbour, which has the potential to support its freight division.

Strong trading at Irish Continental is expected to feed through to strong cash generation as the group currently has relatively minimal capital expenditure requirements. Net debt dropped from €61.3m at the year-end to €45.5m over the first four months of the year. Broker Goodbody forecasts the group could be sitting on net cash of €32.7m by the end of 2017.