UK corporate earnings expectations impacted by sharp drop in pound sterling

UK corporate earnings expectations are being impacted across the board by the sharp drop in the value of the pound sterling since the country voted to leave the European Union on 23 June.

For many, the steep decline will have a negative impact on profits, but for others (mainly exporters) the drop in the value of the pound might help boost profits substantially.

A weaker sterling can be beneficial to UK exporters.
A weaker sterling means a more competitive British export sector.

Take Rentokil for example, a public company listed on the FTSE 250 which announced on Thursday that the recent plunge in the pound means profits for 2016 could almost double. Rentokil generates 90% of earnings from markets overseas.

Associated British Foods, the British consumer conglomerate, similarly announced that its bottom line would be boosted in a trading update on Thursday. Bottom line refers to a company’s net income.

The company, which owns the fashion retailer Primark, said that the weakening in sterling following the June 23 vote would mean “a bigger translation benefit in the final quarter with no material transactional effect.”

It added: “As a result, our outlook for this financial year has improved and we no longer expect a decline in adjusted earnings per share for the group for the full year.”

But other companies, such as Sports Direct, said that the weak pound will have a “significant” negative impact on its margins.

The company said in a statement:

“Following the outcome of the EU referendum, we are aware of the associated market volatility and in particular material changes to sterling / dollar and sterling/Euro exchange rates, and the lack of transparency as to how those rates will move in the short to medium term. These factors are likely to impact US dollar purchases and therefore profitability for which the Company is currently not hedged for the FY17 period and beyond.”