In ‘Brexit’ Vote, Britons Pick Corporate Winners and Losers
Source: WSJ
Robert Wall
June 25, 2016
In voting to exit the European Union, Britons also picked corporate winners and losers.
News of the “leave” victory has sent the British pound down 5.9% to $1.368; it earlier traded at a 31-year low of $1.323. The euro lately was off 2.2% to $1.106. If they persist, the currency declines will have far-reaching implications-both good and bad-for large companies operating in the U.K.
“In leave scenarios, U.K. exporters would benefit from improved price competitiveness due to sterling’s depreciation,” Fitch Ratings said in a note before the votes were in. “But U.K. companies with significant foreign-currency debt would face servicing issues.”
LOSERS
Airlines
European air carriers may be among the hardest hit by tumbling domestic currencies, analysts believe.
European airlines from Ryanair Holdings RYAAY -4.35 % PLC, Europe’s largest carrier by passenger numbers, to British Airways ICAGY -30.59 % parent International Consolidated Airlines Group SA make most of their money in their money in pounds and euros, though they have significant costs in dollars.
On an unhedged basis, the exchange-rate impact could reduce earnings a share by as much as 18% at discount carrier easyJet ESYJY -20.22 % PLC, Barclays BCS -20.48 % analyst Oliver Sleath said. IAG, which has significant sales in the U.S., would be less affected.
Still, IAG issued a profit warning Friday, saying that while it still expects a significant rise in operating profit this year, “it no longer expects to generate an absolute operating profit increase similar to 2015.”
The currency impact is lessened by financial instruments the airlines have in place to insulate themselves from exchange-rate volatility. EasyJet PLC said it has about 80% of its dollar needs locked in for the financial year ending in September, and 70% for the following year.
Resources
U.K. resources companies, known for their hefty dividends, could have to spend more to maintain those payouts if sterling doesn’t recover.
London-listed oil companies like Royal Dutch Shell RDS.A -6.43 % PLC and BP BP -4.76 % PLC, which declare dividends in U.S. dollars but pay them in pounds, would have to come up with more of the British currency to meet declared dividend payments, Biraj Borkhataria, an RBC Capital Markets analyst, said in a recent note.
“Uncertainty is never helpful for a business such as ours,” BP said Friday. It added that it doesn’t expect the Brexit to have a significant impact on BP’s business or investments in the U.K. and continental Europe.
Shell said it would work with the U.K. government and European institutions on implications for the company.
Car Makers
The Brexit puts European car makers at risk of both a sharp downturn in demand, and an earnings hit from the fall in the British currency. Germany’s Volkswagen AG VLKAY -6.85 % and France’s PSA Peugeot Citroën PUGOY -21.25 % may be the companies most exposed.
The U.K. has been one of Europe’s most robust car markets in recent years. It is also Europe’s third-largest center for car production.
Evercore ISI in a note said VW’s earnings before interest and taxes could fall ?75 million ($85 million) for every 1% drop in sterling. The hit to VW is particularly strong because its profitable Audi NSU 0.50 % and Porsche brands represent a third of the company’s U.K. sales.
Porsche AG is very active in managing its currencies and has done nothing specific in light of the U.K. vote, a spokesman said.
PSA Peugeot Citroën said the sharp decline of sterling against the euro in the wake of the referendum would force it to decide between raising prices on cars sold in the U.K. or accepting losses on cars sold there to protect market share.
WINNERS
Scotch
Companies like Diageo DEO -4.94 % PLC and Pernod Ricard SA, PDRDY -5.57 % which generate 25% of their sales from blockbuster Scotch whisky brands like Johnnie Walker and Chivas Regal, could see a “significant currency benefit” from the decline in sterling, Credit Suisse CS -16.11 % analysts said in a note before the vote.
While the Scotch Whisky Association, which represents Diageo, Pernod and other Scotch makers, had said a vote to leave would hurt the export-focused Scotch industry, Credit Suisse said the currency benefit could “more than offset the potential underlying business risks.”
The bank estimated Diageo’s earnings a share could rise 9% to 17% on the weaker sterling, and Pernod Ricard’s 6% to 9%.
Diageo shares rose despite Friday’s market downdraft, up 0.4% to £18.41, but the more euro-exposed Pernod Ricard was down 3.2% to ?93.56.
Luxury Goods
European luxury-goods companies could enjoy a windfall from currency volatility. Overseas sales would yield higher profits when repatriated into the European currency.
Companies more exposed to Asian or American markets would gain the most from a weaker euro.
Luxury conglomerate LVMH Moët Hennessy Louis Vuitton SE, LVMUY -10.37 % for instance, said that only 22% of its 2015 sales were invoiced in the European currency, compared with 32% in dollar revenue.
Not all of the luxury prospects are positive: The weaker pound will force British houses to pay more to their eurozone-based suppliers. Burberry Group BURBY -8.09 % PLC has about 65% of its costs in euros, analysts at Sanford C. Bernstein estimate.
William Boston, Saabira Chaudhuri, Manuela Mesco, Eric Sylvers and Selina Williams contributed to this article