Comfort-Delgro – The impact of BREXIT

UK/Ireland is the second largest revenue generating market after Singapore for Comfort Delgro (CD). As of Q1 2016, CD derived about 23% and 11.4% of its total revenue and operating profit respectively from this market. This translates to an amount of S$228.5m and S$1.25m respectively for that quarter. As news is still coming forth from UK as a result of the Brexit, it is difficult for one to able to know when the sterling pound will stabilise against the Singapore dollars (SGD). Hence, it is difficult to assess the effect of the sterling pound depreciation on companies such as Comfort Delgro, which has on-going exposure to the UK/Ireland market. Even if it stabilised, it also depends on how and when sterling pounds were realised against SGD. However, we do now that the sterling pound has depreciated and is likely to be weak in the months ahead as the fallout of the Brexit has not been fully discounted by the market. As of today, the sterling pound has approximately depreciated more than 10% since the beginning of the year, and a good approximation would be to make an assessment based on 10% or 15% depreciation of the sterling pound against SGD.

Using the recent quarter financial results as a backdrop, (see table 1 and table 2), a depreciation of 10% in sterling pound translates to about $23m and S$1.8m loss in revenue and operating profit respectively for the recent quarter. This should represent about 2.3% and 1.6% loss in the revenue and operating profit respectively.  Similarly, if the sterling pound depreciates 15%, then the revenue and operating profit loss would be 3.4% and 2.5% respectively.

Of course, there were very simplistic assumptions that we had made these calculations.

(1)    We assume that other economies like China and Australia did not (and will not) also weaken their currency to counter the weakening sterling pound. If they do, then the overall revenue and operating profit loss including those from China and Australia may become higher after converting to SGD. In a similar manner, the MAS may also weaken the SGD in view of the strength of SGD.

(2)    The mode of travelling by commuters in UK remains fairly unchanged after the Brexit. This is probably a valid assumption as CD’s land transport operation represents an essential transport service, and it is unlikely to affect the commuters’ behaviour significantly due to unfavourable exchange rate which is external to UK.

(3)    It is also assumed that there is no significant seasonal change in the travelling mode. Hence, the quarterly result is a good representation of the whole year results.

(4)     The operating cost components remain fairly unchanged with respect to the revenue. Thus, the only effect is the exchange rate difference.

Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.