Sarasin holding off on Ryanair and CRH stakes


Sarasin holding off on Ryanair and CRH stakes

Investor highlights concerns over Ireland’s corporate behemoths, writes Michael Cogley

CRH chief executive Albert Manifold — Sarasin has decided to hold off putting his company into its portfolio for now
CRH chief executive Albert Manifold — Sarasin has decided to hold off putting his company into its portfolio for now

Asset management giant Sarasin & Partners has shied away from investing in Ryanair and building materials company CRH after conducting in-depth analysis into both companies.

The London-headquartered firm, which has €15.7bn under management, predominantly invests on a long-term basis with clients typically receiving returns of between 5 and 7pc. Sarasin has significant shareholdings in companies like Disney, US materials business Home Depot, and Google-owner Alphabet.

Speaking in the company’s Dublin office on St Stephen’s Green, Sarasin’s global head of equities Jeremy Thomas said that issues like the recent spate of strikes at Ryanair meant that there was an element of unpredictability about the company.

“We were uncomfortable that the margins could be sustained with the way the pay model works within Ryanair and therefore it actually failed our process,” he told the Sunday Independent.

“If we were going to look at Ryanair again we would want to feel confident that these issues have washed through and we would want to engage with the company and make sure that it was the right place [to invest in].”

Ryanair’s sometimes difficult relationship with certain groups of staff is cited by Sarasin as a reason as to “why the stewardship considerations of a company is important”, said Thomas.

“Strike days are a compression in margins, around the cost impact of losing revenue or having to pay staff more,” he said.

“Clearly it has some impact on our view if customers will or won’t want to fly with them. In the end it’s about ticket prices. They have the lowest cost structure so the sustainable competitive advantage for Ryanair, if there is one, is that it genuinely is the lowest low-cost airline, which you can always make money from when ticket prices are at their lowest.”

The former Allianz Global Investors equity manager said that Ryanair was facing increased staff costs due to the recognition of unions. Thomas said the increased staffing expenses will mean that the airline will be “a little bit less low-cost than they were” and that it will result in less profitability per customer.

He was quick to praise Ryanair’s embattled chief executive Michael O’Leary, saying that he had built a “world-class business”.

Ryanair said that the majority of its shareholders were “hugely supportive” of the company and its policies. The airline also said that there had been a “tiny number” of industrial disputes this year.

Thomas also pointed out that he had met CRH “three or four times” and had spent three months evaluating it as an investment opportunity. He said the company, which has a valuation of around €20bn, was undervalued compared to its American competitors.

“That said the steam looks like it’s just about to come out of the US economy,” he said.

“Now, that’s quite a big statement because the US economy is going gangbusters but in 2019 and 2020 the rate of growth will be lower than it is now in our view. That will have an effect on higher interest rates charged on housing, autos and so on.”

The equities chief also said that the probability of continued improvement in their main markets would become more difficult “particularly as they’re more orientated towards the US now”.

CRH entered the US market more than 40 years ago and has become one of the largest materials groups in North America, where it makes up half of its sales.

“We have a view that CRH is a perfectly decent building materials business, but that doesn’t necessarily mean that we’re putting it in the portfolio today,” Thomas said.

“Probably in the next recession, the number of levers that will be there for policy makers to pull will be somewhat limited. I suspect we’ll get a big infrastructure programme coming in the US and probably even in Germany and then we will know that CRH is a sensible place to go.”

Sarasin, which has been in Ireland for more than 10 years, was one of the early adopters of “thematic investing”, whereby it breaks down opportunities into long-term trends and then buys into companies that suit those trends.

The company operates across five main themes: digitalisation, the impact of ageing, the evolving patterns of consumption, and climate change.

“The themes ought to give us companies that can generate revenue faster than other companies,” Thomas said.

“We don’t invest in startup companies. You’ll almost never find a loss-making entity in our portfolios. Usually $5bn market cap or bigger. We’re looking for companies to generate decent growth.”

He admitted that Sarasin had sold out too early from its investment in Netflix. Sarasin held a stake in the streaming service for five years but sold it early last year. Thomas said this decision was taken due to concerns around how much more money the company could take from subscriber households as well as potential threats from Apple and Amazon.

“We sold Netflix much too early, in many cases the results they have posted since then have exceeded our expectations,” he said.

Sunday Indo Business

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