Profiting from the pound’s problems

As currency markets blow cold on sterling, Robert Tyerman looks at some potential winners from the pound’s discomfort

A massive public sector deficit and the threat of a revival of inflation may be unavoidable parts of the price the UK has to pay for Government efforts to lift the country’s economy out of recession. But these developments are inevitably having an impact in the foreign exchange markets and undermining confidence in sterling.

The pound recently touched a nine-month low of $1.5377 against the US dollar, amid concern over January’s public sector deficit of £4.3 billion, the worst January shortfall for at least 17 years. Sterling has even showed signs of wobbling against the euro, beset though the European currency has been by the Greek government’s financial crisis.

In these circumstances, it makes sense for investors to consider those British companies that stand to benefit from sterling’s woes because they make much of their money abroad. These companies come in many shapes and sizes.

Exporters, miners, oil companies, London market insurance underwriters and brokers and other companies dealing in commodities and services denominated in US dollars and those with operations based in stronger-currency countries should all have a chance to profit to a greater or lesser extent from a shaky sterling. Some have other fluctuations to contend with, such as raw material prices or the non-life insurance premium cycle, and some have hedged their foreign currency exposure in a way that reduces risk but also limits the gains from currency movements, but most are finding some comfort in the pound’s predicament.

However, buying into a company simply because of its foreign exchange exposure regardless of its other fundamental merits is a risky undertaking. The ones to watch are those that combine a good intrinsic business with the added spice of currency benefits.

Healthy inroads
AIM-quoted Craneware, for example, is making profitable inroads into the vast US healthcare market from its base in Livingston, Scotland, with software designed to enhance the financial operations of US hospitals. Steered by chief executive officer Keith Neilson, the company, which has followed a 40 per cent profits gain in its last financial year with a 28 per cent interim increase to £2.1 million pre-tax, has signalled further growth of at least 30 per cent in its first half after launching new software called ChargeLink to help hospitals optimise reimbursement for chargeable items.

Craneware’s market is driven by the US government’s urgent need to curb ominous cost growth in that part of the national medical system that Washington even now funds. With another strategic pricing product on the drawing board for later this year, Neilson says the company, which has recently won a long-term contract for its Chargemaster Toolkit and other services from New York State’s largest integrated health system, North-Shore LlJ, incurs a relatively low percentage of its costs in Scotland, though its results reflect translation from dollars into sterling.

‘Our mix of currency costs provides a natural hedge,’ argues Neilson, ‘though we do watch currencies and make sure any predictable move is covered. A strong dollar is good for us, but we coped when it was $2.12 to the pound.’

On a larger scale, fully listed aerospace tooling engineer Hampson Industries has spent five years buying companies across the Atlantic to take the North American share of its £250 million turnover from 3 per cent to 80 per cent and now makes more than 90 per cent of its earnings from North America. The company, which makes mouldings, tools, engine components and parts for commercial and military aircraft and also sells into Europe, Asia and Russia, operates in an industry where transactions are denominated in US dollars and has recently raised nearly £60 million.

This was partly to reduce the gearing resulting from the US acquisition spree, but more importantly to enable Hampson to take advantage of long-awaited technical breakthroughs, such as using composite materials in critical primary flight structures for large commercial aircraft. Profits and sales have recently fallen as customers have delayed committing themselves to the new technology, but Hampson cites December’s delayed first flight of the Boeing 787 Dreamliner and cuts in delays to the US Joint Strike Fighter programme as signs of a new dawn.

Branding its operations in the USA as local, Hampson, steered by chief executive Kim Ward, says most of its costs are in dollars, except the dividend, but its profits will benefit from a relative strengthening of the US currency when translated into sterling. A leader in its niche areas, the company is ‘incredibly optimistic about the medium to long term’.

A ‘particular boost’
Jonathan Milner, chief executive officer of Cambridge-based bioscience concern Abcam, has cited ‘favourable exchange rates’ as providing a ‘particular boost’ to the AIM-quoted company’s interim results to December. Abcam, which supplies antibodies via its own online catalogue for protein interaction studies, increased pre-tax profits 118 per cent to £17.4 million in the year to last June and derives more than 90 per cent of its revenues from abroad.

The company, which recently revised its full-year expectations upwards, is hoping for a ‘continued resilience’ in the scientific research sectors that it supplies. Meanwhile, Milner has hinted that Abcam could re-domicile itself offshore if the British government does not reduce corporation tax.

StatPro, which provides portfolio analytics for fund managers around the world and now draws 80 per cent of its turnover from abroad, increased first-half profits fourfold to £4 million and speaks enthusiastically about current prospects. Chief executive officer Justin Wheatley says the Wimbledon-based company has particularly high hopes for its StatPro Seven product, launched last year, and its sister StatPro Revolution, coming this month.

StatPro Seven, marking the transformation of the AIM-quoted company’s product range from distributed software to software-as-a-service (SaaS), consolidates all its software modules onto a single platform, combined with global market and index data. It is targeted at big players, paying six figures per month, while StatPro Revolution, a simplified version using the same basic system, will seek to attract the 30,000 companies managing relatively modest sums which Wheatley suggests could find it worthwhile – he likens Revolution to a ‘bottle’, compared with Seven, which is a ‘barrel’.

‘The internet is the key,’ explains Wheatley. StatPro develops its software in ‘cheap’ South Africa and sees Asia as an increasingly important market, with US exposure targeted to increase significantly in two years.

With this international spread providing a ‘natural hedge’, the company matches costs against revenues in different currencies. ‘We take some forward positions for the repatriation of profits,’ explains Wheatley, adding, ‘I have no sleepless nights.’

Local hedging
Also versed in hedging is Cyprus-based telecoms consultant Norcon, another AIM luminary that handles project management, outsourcing and a range of other activities in this field and consolidates its figures in US dollars while hedging in the currencies of its areas of operation.

Strong in the Middle East, especially Saudi Arabia, where directors boast client relationships going back more than 50 years, the company, headed by chief executive Arnold Rerholt, has reopened its Norway office and says it is eagerly preparing for the widespread adoption of 4G technology, which, among other attributes, assists the use of video and TV on mobile phones.

Norcon, which increased interim pre-tax profits 6 per cent to US$5.2 million (£3.25 million) on turnover up 7 per cent to $37.4 million, has no senior debt and hopes to continue organic growth, with no acquisitions currently planned. Norcon is tightly held and aims to distribute half of net income.

Another company currently enjoying the benefit of favourable translation of profits into sterling is Bango, the AIM-quoted mobile web payments and analytics concern, which has built its overseas content from 10 per cent to 60 per cent over two years. Bango doubled interim sales to £12.3 million and cut losses by two thirds to £242,200, and recently raised £3 million to enhance its service and improve margins. It has built up a useful business in continental Europe and established a presence in the USA, where, says chief executive officer Ray Anderson, mobile internet is belatedly taking off.

With international customers, including News Corporation’s Fox TV, Anderson says most operating costs will be incurred in the USA, which limits Bango’s ‘net exposure’, though most fixed overheads are in sterling. ‘Currency fluctuations do need planning for,’ he comments, ‘but a strong US dollar does give us a boost, while particularly interesting opportunities present themselves in India, Brazil and Indonesia.’

Less excited by the pound’s weakness against the greenback is Martin Thorneycroft, finance director of derivatives trading software specialist Patsystems. The acquisitive AIM player was able to weather the financial markets blizzards and lift annual profits 7 per cent to £3.9 million last year, on turnover up 13 per cent to £22 million thanks to growth in China, the Far East and other developing markets, and has considered listing in or even relocating to Hong Kong.

But Thorneycroft runs a monthly rolling hedging programme, which locks in the sterling value of three-quarters of local surpluses unmatched by local costs for a year head. This has the effect of minimising the damage to sterling-denominated profits caused by a strong pound, but counteracts the benefit of a weak pound, so that Patsystems can benefit from the underlying growth in these markets without gambling on what currencies will do.