This week’s tenth anniversary of the advent of the euro may have passed without ceremony, but for a swath of British companies the single currency, or rather its recent rapid appreciation against sterling, is something to cheer. For at a time when global recession is putting corporate profits and dividends under severe pressure, sharp foreign exchange moves are coming to the aid of the stock market’s big euro earners.

With sterling and the euro now edging close to parity, the revenues that London-listed companies are repatriating from the Continent are roughly a third higher than they were this time last year.

That phenomenon explains why, during the usually dormant Christmas period, a clutch of FTSE 100 constituents have been rewarded with rises to their profit forecasts – or, at worst, are seeing estimates left on hold on the assumption that currency benefits will offset an expected deterioration in underlying trading. Credit Suisse this week raised its recommendation on Vodafone Group to a “trading buy” on the view that sterling weakness is likely to enable the mobile telecoms operator, which has extensive operations in Germany, Spain, Italy and Eastern Europe, to beat consensus profit forecasts. That outlook contrasts strongly with Vodafone’s key European rivals, France Télécom, Telefónica and Deutsche Telekom, which, as the respective owners of Orange, O2 and T-Mobile, and hence big sterling earners, are all having their profit forecasts cut.

Elsewhere, British companies as diverse as Aegis Group (owner of Carat, the French media buying agency), Rexam (Europe’s biggest beverage can maker), and National Express (which runs Alsa, the Spanish bus operator) are seeing their numbers tweaked courtesy of the euro. Reckitt Benckiser, the maker of Cillit Bang and Harpic that draws 28 per cent of its sales from the eurozone, was already expected to enjoy a 10 per cent year-on-year rise in its reported earnings from the euro’s appreciation, and this month’s currency gyrations will only have furthered that advance.

For companies that have a disproportionate amount of revenues in euros relative to their costs – such as SSL International, the owner of Dr Scholl and Durex – the effect can be even more pronounced.

But sifting the euro winners from the losers is far from straightforward: a high sales exposure to the eurozone does not necessarily translate into higher profits.

First, much, if not all, of the benefit can be absorbed by currency hedging arrangements, the terms of which are not always clear. Second, the tendency of companies to match the currency composition of their borrowings to the geographic mix of their sales means that higher euro revenues are often offset by higher interest and coupon payments on euro-denominated debt. Shanks Group, the waste-treatment specialist, draws 76 per cent of its sales and 91 per cent of its profits from Belgium and the Netherlands, but also carries £270 million of net debt, some of it in euros. Further, for euro borrowers, currency appreciation will also inflate a company’s reported net debt position in sterling, giving it less headroom under its existing borrowing facilities.

For example, sterling’s weakness against both the euro and dollar have sent the expected year-end net debt of Bunzl, the packaging distributor, up to £915 million, nearly £200 million higher than this time last year.

Such complexities mean that it is easier to identify the potential currency losers among companies with sales in sterling but a high proportion of their buying costs in euros. Carluccio’s, which owns a chain of upmarket cafés and delicatessens, sources the bulk of its produce from Italy, meaning it faces the prospect of passing substantial price rises to its customers at a time of weakening consumer spending or absorbing some of the hit itself. The same applies to Majestic, the wine warehouse operator, which has about half of its buying costs in euros. Airlines and tour operators are another possible casualty. Although they have received a big fillip from the tumbling price of oil since the summer, they must contend with a stronger euro that threatens to put overseas holidays out of reach of straitened British customers.

There are mitigating factors. Thomas Cook and TUI Travel are vigorous hedgers of currency and have already covered 90 per cent or more of their euro requirements for this summer’s season. Thomas Cook has also steadily diversified, such that it is also able to capture demand for resorts outside of the traditional short-haul destinations in the eurozone, such as Egypt and Turkey.

And the likely winners? Elsewhere in leisure, Whitbread might be expected to fare well, benefiting from a predicted surge in Britons holidaying at home - primarily through Premier Inn, its budget accommodation chain, but also through its Brewers Fayre and Beefeater restaurants.

Of potentially greater interest to investors is the scope for a weakened sterling to kickstart a wave of merger and acquisition activity of British targets by eurozone buyers, not withstanding the continued paralysis of the debt markets. Ask holders of Invensys, the automation and controls specialist, where revived rumours of interest from Germany’s Siemens have helped the shares up 30 per cent in the space of a month.

Continental drift
(Proportion of revenue in euros)

Shanks Group 76%
Logica *75%
Kesa Electricals 65%
COLT Telecom 61%
Davis Service Group *58%
Vodafone Group 59%
Imperial Tobacco 45%
Reed Elsevier 39%
Spirax Sarco 37%
Aegis Group 35%

*includes Nordic countries

Source: Company presentations, Hemscott

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