Green shoots

It’s therefore no surprise that investors and analysts have concerns that another bubble is building. The numbers, and more specifically the sectors where growth is most evident, show worrisome similarities to the late 1990s, only a matter of years before things took a serious turn for the worse. This includes sectors such as construction, which grew by 9 per cent last year and accounted for much of Irish GDP growth around the turn of the millennium, too.

Of course, it’s important to recognise that the risk factors to Irish growth look entirely different compared with the early noughties. Most prevalent is the chance of a UK ‘Brexit’. Obviously, only Northern Ireland would leave with it, but the UK is a crucial export market for companies based and operating in the Republic of Ireland, particularly those specialising in goods and services. Much also depends on Ireland’s banking sector, and it taking a more responsible approach in the future. After all, it’s the consensus belief now that it was Ireland’s banking culture that eventually took it under in 2008 and not government overspending or poor export policies.

In this feature we do three things. First, we’re taking a walk down memory lane to analyse the cause and effect of the last boom-and-bust cycle in Ireland. More specifically, we look at the lessons learnt and how the situation could differ this time around. Second, we take a look at an array of quality companies to be found across the Irish Sea, and how they stack up as individual investments as well as to what degree they are tied to Ireland’s wider economic trends. Finally, we offer practical advice. Many Irish companies can be traded via duel listings on the London Stock Exchange, but most aren’t included in London’s trackable FTSE indices, so we’ve cited some ways investors can make a play on what we’re calling the ‘Celtic opportunity’ through low-cost collective vehicles.

Ireland: a history lesson

For much of the 100-year period since the Easter Rising, Ireland’s economy has struggled under the weight of history. The economy, some might say, was ideologically driven in the first three decades following partition, then remained largely dependent on agricultural output, much of that also being based on uneconomically small farms. Throw in the effects of the Great Depression, a trade war with Great Britain in 1932 and the destabilising effects of the Second World War and it is hardly surprising that a largely agrarian, depopulated nation on the edge of western Europe took a while to get into gear.

Ireland’s economy was subject to successive reforms since the late 1950s, although the net outflow of young skilled labour held back the rate of economic growth – a structural impediment that only started to ameliorate once high-technology industries took root in the country in the mid-1990s. That spur to the economy was driven to a certain extent by the European Structural Funds system which came into effect in 1973, but there’s no doubt that Ireland’s chief advantage is a youthful (by European standards), highly-educated workforce – it’s just a matter of keeping them at home.

The St Patrick's Day Massacre

Once the Irish economy came out of the blocks, the effects were astounding: Ireland’s economy expanded at an average rate of 9.4 per cent between 1995 and 2000, and continued to grow at an annualised rate of 5.9 per cent in the years through to the Global Financial Crisis. The period was characterised by rapid economic growth fuelled by foreign direct investment, but it eventually gave way to a property bubble that brought down capital markets, rendering the productive economy uncompetitive.

With terrible irony, leveraged positions started to unwind on St Patrick’s Day in 2008, when shares in Anglo Irish Bank lost 22 per cent of their value. A banking crisis rapidly ensued, exacerbated by liquidity shortfalls as loan books for institutions either side of the Atlantic came under the microscope.

Ireland’s economy, or its ‘real’ economy was subsequently shackled by a public debt crisis, the severity and speed of which was, if anything, even more troubling than the banking crisis. By midway through the year, Ireland’s small fiscal surplus had somehow metastasised to a deficit equivalent to 7.2 per cent of GDP. The speculative levers of the construction industry and property market came to an abrupt halt.

Harsh medicine and the political cost

Irish governments could certainly never be accused of timidity in their response to the crisis. The Lenihan administration brought in the first of four severe ‘austerity’ budgets and within nine months, €10bn was withdrawn from the economy through tax increases and spending cuts – that’s in a country of 3.5m people. In the five years that followed, wages plummeted – both in absolute and real terms – yet income taxes collected from those still at work increased by €2bn. The inevitable result was a massive fall in discretionary income, the severity of which was masked to an extent by an accompanying bout of deflation. Ireland quickly wrote off its bad bank debt and made drastic financial reforms, while the government focused on growing exports, an objective helped along by a fall-away in the value of the euro against sterling – Britain remains by far and away Ireland’s most important trading partner.

Understandably, the reform measures haven’t been met with universal acclaim – and a political price has been paid. Despite Ireland’s ‘Celtic tiger’ growth miracle, prime minister Enda Kenny’s government was shown the door at the recent general election. Indeed, for the first time since the foundation of the Irish state, the two main traditional parties Fine Gael and Fianna Fáil barely received a majority of first preference votes, signalling a period of flux in Ireland’s political party system that is being mirrored across the political spectrum in Europe.

An export-led recovery

Much of the recent growth spurt is linked to a 20 per cent surge in export remits. The strengthening of sterling against the euro on foreign-exchange markets in 2015 has also boosted Irish exports to the UK. Of course, this was due, at least in part, to the ECB’s continued bond-buying programme, although the long-term beneficial effects of quantitative easing on the wider eurozone have been brought into question as the continent’s growth rates remain anaemic.

Given that it has become synonymous with asset bubbles and bad debt provisions, it’s doubtful if many in Ireland would feel altogether comfortable with the ‘Celtic Tiger’ label any more. But the near-collapse of the construction industry and property market has also served to highlight the genuine economic strengths of Ireland’s economy. Sectors such as information and communications technology, medical equipment, pharmaceutical, agri-business (agri-tech and value added exports), and tourism are now driving the recovery. These were the same export-driven sectors that propelled the Irish economy in the second half of the 1990s, prior to the property bubble and banking excesses. Growth in these sectors has been supported by improvements in Ireland’s cost competitiveness and by revivals in economic growth in the UK and across the Atlantic.

The eighth-easiest place in the world to do business

Much is made of Ireland’s corporate tax regime, which has obviously drawn in a number of high-profile multinationals intent on offshoring their tax obligations, but again this detracts attention from the underlying strengths of the economy. Dublin remains intent on moving Ireland forward as a knowledge economy. As a result, the country is now perceived as a magnet for inward investment in terms of both finance and people.

Geopolitical risks remain, particularly given the rise of anti-austerity political factions, but it’s conceivable that Ireland’s business environment will actually strengthen over the long-haul if risk management strictures are tightened in both the public and private spheres as a consequence of the recent tumult. But the country is already an attractive destination for foreign capital. Indeed, Ireland moved up from ninth to eighth in the 2016 Index of Economic Freedom, released recently by The Heritage Foundation and The Wall Street Journal. MR

Irish companies under the microscope

It’s time to round up the best individual stocks Ireland has to offer. Many of these companies have benefited from other macroeconomic factors such as low oil and commodity prices. But, all in all, these companies have been top-performers in their respective sectors, and ones we reckon have further to run, too.

Ryanair

Airlines have significantly benefited from a low oil price and this includes Ireland’s Ryanair (RYA). The company issued a significant profit upgrade as figures started to outstrip market forecasts. The cost of operating its planes at the half-year stage ended up flat year on year without fuel, but dropped 6 per cent including fuel.

However, the company has also been working hard at its ‘always getting better’ strategy, which has involved removing unpopular extra charges and improving customer service. This has also helped increase customer traffic statistics.

How far is Ryanair’s future success dependent upon the future success of the Irish economy? Airlines flourish in a low oil-price environment, but customers with more disposable income help, too. City analysts are concerned about costs per seat at the company, which are not flattered (like cost per passenger) by rising load factors. Overall, it seems margin expansion at the company is coming only from lower fuel expenses. That suggests once the oil price reverses, so too will Ryanair’s fortunes.

Paddy Power Betfair

No, we haven’t confused two gambling companies. Last year Irish group Paddy Power announced an offer for British rival Betfair, and the two businesses officially completed a merger in February 2016 as Paddy Power Betfair (PPB). As of the last set of results prior to the merger in August 2015, Paddy Power operated 588 betting shops across the UK and Ireland, specifically 336 sites across Britain and 252 shops in Ireland. Irish retail sales rose 10 per cent on a like-for-like basis, with operating profit up 36 per cent to €10.6m.

That might make Paddy Power sound quite dependent on the prosperity of the Irish economy and more so its citizens who have more disposable income to spend on gambling. What makes this a slightly more defensive stock is the combined entity’s online prowess. Although numbers are still reported separately at this time, it’s thought the combined group would have reaped 87 per cent of total group operating profit from online activities. The strongest-performing region for online activity was, in fact, Australia.

Applegreen

Less than a year since its debut on the London Stock Exchange, petrol forecourt retailer Applegreen (APGN) topped the €1bn revenue mark. Profits and earnings per share look a little worse for wear right now, but that’s because the group is still busy absorbing costs from the IPO and certain share-based payment charges. Last year, the number of sites across the UK, Ireland and the US reached 200, compared with 152 in 2014. In Ireland, Applegreen operates nine motorway service areas and plans to add another four this year. It also operates 77 petrol filling station developments over there, of which 50 fall under the Applegreen brand. Another seven of these sites are due to open in Ireland over the course of 2016.

Applegreen isn’t as tied to the oil price as the oil and gas companies supplying the forecourts, although lower fuel bills do mean customers have more cash to spend in stores. Applegreen is focused on international expansion, though, as seen by its expanding presence across Britain and the US.

Fyffes

Last year, fruit exporter Fyffes (FFY) delivered its seventh consecutive year of adjusted operating profit growth to hit €45.8m – a 14 per cent increase on 2014. True, it’s faced some challenges including currency impact and a sizeable pension scheme charge last year. But that hasn’t stopped analysts from consistently upgrading forecasts for the company over the last couple of years. At one time, there was speculation the group might make a prime takeover target (its merger with produce giant Chiquita ultimately failed in late 2014), and with the level of consolidation in the food production, agriculture and ingredients market at the moment, this might still prove to be true. To us, the shares still look like pretty good value (they trade on just 11 times forward earnings) and, although the group is Irish-based, it might just be one of the country’s most diverse and globally exposed companies.

Fyffes isn’t the only agriculture producer flying high on Ireland’s equity markets. Since floating in 2007, Total Produce (TOT) has seen its share price rise steadily as it’s recycled strong cash flows into acquisitions to build up a leading poition in global fresh fruit and vegetable markets.

Glanbia

Global nutrition and ingredients business Glanbia (GLB) is headquartered in Ireland, and has its origins in the Irish co-operative movement that evolved over the past century. The 1960s saw many small co-operatives across Ireland amalgamate and, in 1964, the Waterford Co-op Society was formed, with Avonmore Creameries formed two years later in 1966. Glanbia was eventually created in 1997 out of the merger of Avonmore Foods and Waterford Foods. As of last year, Glanbia reported adjusted earnings per share growth of 10.6 per cent at constant currency, its sixth consecutive year of double-digit growth. It also achieved a return on capital employed of 13.9 per cent.

The group has a dairy business in Ireland, which saw a significant recovery in margins and overall performance during the course of 2015. Its Irish ingredients business has also benefited from higher volumes following the abolition of EU milk quotas last year.

However, the biggest proportion of Glanbia’s still come from its overseas markets, not least its Performance Nutrition business which sells branded products to the fast-growing health and fitness markets. It’s a similar story at Kerry (KYGA), which has moved well beyond its dairy industry roots to grow into a provider of speciality ingredients to the global food and beverage industries. In recent years, it’s benefited from strong demand from manufacturers keen to reformulate their products with more healthy inputs.

Irish Continental

Shipping and ferries group Irish Continental (ICGC) is a recent IC tip and, at the time of writing, is up 30 per cent on the tip price of 419¢. It’s another example of a group that’s benefited significantly from a lower oil price plus a recovery in the Emerald Isle’s economic fortunes. Passenger and car numbers both rose healthily last year compared with the wider market, while the annual fuel bill fell by more than a quarter to €39m.

It was this magazine’s view back in August 2015 when we tipped the shares that this was an excellent way to plug in to the burgeoning Irish economy and its links to the recovering UK and mainland Europe. Of course, a healthier economy (not to mention the weak euro) has led to a boom in Irish tourism, which directly affects trading at Irish Continental. The group’s ferries division, where its Irish Ferries brand sits, saw revenue rise 10.6 per cent to €204m last year.

Green REIT

Green REIT markets itself as “Ireland’s first real estate investment trust” and has been a member of the Irish and London stock exchanges since mid-2013. Its property portfolio has an estimated value of €1.25bn, which includes 25 properties with a 92 per cent concentration in the Irish capital of Dublin. Most of that space is commercial, with 77 per cent of rent payments coming from office space.

As part of the half-year results statement released in February, Green REIT announced a 19 per cent improvement in the value of net assets, and is now on site at four new planned locations across Dublin. Bosses there concur that the Irish economy is working in its favour. Particularly beneficial trends include lower unemployment rates, growing retail sales, and hopes for a balanced budget by the end of 2016. All in all, the board reckons these “supportive fundamentals” will help it grow shareholder returns this year.

Like Green Reit, Hibernia Reit (HBRN) is well positioned to capitalise from Ireland’s economic recovery, and is benefiting from a dearth of office development that followed the credit crunch. Since floating in December 2013, it’s portfolio of Dublin offices has experienced a huge increase in valuation as rising tenant demand and the scarcity of prime assets has underpinned significant rental increases.

A practical guide to investing in Irish stocks

How to invest?

All of the companies we have looked at in this piece are held in the Wisdomtree ISEQ 20 UCITS ETF (ISEQ). The index comprises 20 of the most liquid and largest market capitalised securities listed on the Irish Stock Exchange and they are reviewed and rebalanced on a quarterly basis. It is also most weighted to the industrials and consumer staples sectors. Its largest shareholding, according to the fund’s latest data, is Ryanair.

The iShares MSCI Ireland Capped ETF (US: EIRL) run by BlackRock, which trades on the US stock exchange, makes for an interesting comparison. This fund is also heavily weighted towards the materials and consumer staples sectors, although it also has significant representation of the financials and industrials markets. Its largest holding is buildings materials group CRH (CRH) – another top IC pick. The group has been highly acquisitive of late, spending nearly €8bn on 20 bolt-on deals last year alone. That helped lift operating profit by a whopping 39 per cent to €1.28bn. The group continues to grow well in the UK, Ireland and the Netherlands, although the European division is likely to remain flat as a whole, as markets including Germany and France continue to be weak. HR

A note on dividends

Catriona Coady, financial planning manager at Irish stockbroker Goodbody, points out that Dividend Withholding Tax (DWT) is applied at the standard rate of income tax – 20 per cent – on dividend payments made by Irish companies domiciled in the country. However, when the recipient of the dividend is a UK tax resident, who is neither tax resident nor ordinarily tax resident in Ireland, exemption from DWT can apply. UK residents are able to apply for exemption through the certification and application process set out by the Irish Revenue Commissioners. It is also possible to apply for relief from double taxes if the payee is usually liable to both UK and Irish taxes. This is applied under the Double Tax Treaty in force between the UK and Ireland. However, the relief rate available depends on an individual’s personal circumstances.