Dollar decline will hit Irish companies

THE fall in the value of the dollar will impact negatively on the earnings of Irish companies with exposure to US markets, hitting earnings by an average of 2% to 3%.

Merrion Stockbrokers head of research Rory Gillen said the decline in the dollar in recent months had picked up pace in the first few weeks of 2003.

“Imbalances in the US economy, reflected in a widening trade deficit and fears over possible war with Iraq are the principle factors undermining confidence.

We have estimated the impact on Irish companies for a full year of using less favourable translation rates and on trading, assuming these rates hold at these levels, ie a /$ translation rate of 1.10 and a /stg£ of 0.67.

“In terms of the translation impact, the average reduction in profitability is circa 2-3%. Among the financials, Allied Irish Banks (-2.7%), Bank of Ireland (-1.6%) and Anglo (-2%).

Irish Life & Permanent has limited international exposure in terms of profitability, but it has US dollar assets in its funds under management, which at the embedded value level could result in a circa 3% reduction to reported profitability.

Elsewhere, among the industrials, our estimate of the full year impact is as follows, Kerry (-5%), IAWS (-3.4%), Greencore (-4%), Glanbia (-3.3%), Jury’s (-3.7%) for 2004 as 2003 is hedged, Galen (-2%), CRH (-2%), Kingspan (-2.5%), Grafton (-2.3%), Abbey(-2.0%),” explained Mr Gillen.

However, in terms of trading impact Waterford Wedgewood, who export to the US, could take a drop in earnings of between 14%-16%.

A Waterford Wedgwood spokesman said they were fully hedged for 2003, but also revealed that they have unravelled their hedged position for 2004 when they expect the dollar to be stronger.

As Mr Gillen’s prediction is based on the belief that Waterford Wedgwood are unhedged, the impact should be well below the 12%.

“Fyffes should be a beneficiary of a weak dollar as it imports bananas from dollar regions and sells into Europe. However, the impact is difficult to quantify.

The reason is that any gains will be shared with supplies, as was the case when supplies had to bear some of the burden of the margin hit which resulted from the strengthening dollar in 2000,” he said.

Irish companies, whose losses due to the fall of the dollar arise from currency translations and not transactions, may opt to make acquisitions in the US and or pay down dollar debt.

Companies like Kerry Group have massive production capability in the US and consequent debts are ideally placed to take this option and reduce actual exposure to the fall of the dollar.

Traders and analysts alike watched Hans Blix, chief weapons inspector for the United Nations, deliver his report to the UN security council.

Increasing hawkish rhetoric from British and US officials over the weekend had earlier pushed the euro to a fresh three-year high at $1.0907 in European morning trade on Monday, as stock markets fell sharply on fears the US and Britain would attack Iraq without UN backing.

The euro fell back to $1.083 as Mr Blix delivered his report. Traders said rumours Saddam Hussein was ready to accept exile had supported the dollar. Sterling, which reached $1.6411 against the dollar, eased to $1.633.