When should Comfortdelgro be worried about Brexit?

Limited impact unless GBP weakens vs SGD on this level.

Global financial markets were thrown into turmoil last week on increased uncertainty over global economic outlook after majority of British voters voted for the United Kingdom to leave the European Union. But while BREXIT’s economic impact on Singapore is expected to be limited, the market has kept watchful eyes on local companies with significant exposure to UK. Among them is ComfortDelgro (CDG).

Research firm RHB has lowered CDG’s FY16-17 profit by 4.0-4.8% to partly account for lower earnings from its UK taxi business and a translation loss for its UK businesses from a weaker GBP vs the SGD.

CDG’s operations in the UK are largely from the operations of Metroline coupled with coach services and operation of taxi circuits. RHB analyst Shekhar Jaiswal estimates that UK accounts for 21% of earnings. Businesses in the UK account for 25% of ComfortDelGro’s (CD) revenue and 21% of its operating profit, of which 90% of revenue and 97% of operating profit are derived from operation of bus services, with the rest from operation of taxi services.

As CDG is guiding for an increase in UK revenue amidst expectations of strong growth of its bus business, RHB expects earnings from its UK bus business to be more resilient vs earnings from its UK taxi business.

“The International Monetary Fund (IMF), in its latest annual report on the British economy, said that the UK’s exit from the European Union (Brexit) could lead the country into a recession. While we do not expect the UK to enter a recession, we do expect some weakness in its economy over the next few years, which may translate into lower profits for CDG’s UK taxi business.”

Meanwhile, the GBP weakened 6.8% against the SGD amidst the confirmation of Brexit. According to Jaikwar, a weaker GBP would translate into lower profit contribution from CDG’s UK operations. Nonetheless as CDG does not remit UK earnings to Singapore, he believes there is negligible impact on its cash flow from the weakening of the GBP.

“We lower our FY16-17 GBP/SGD exchange rate estimate by 10-13%, translating into 2-3% lower earnings.,” he said.

Eugene Chua, analyst at OCBC Investment Research also thinks that the impact of a depreciating GBP against SGD on CDG’s earnings is limited based on its exposure to UK/Ireland businesses, unless the market sees a further plunge of more than 10% in the GBP against the SGD.

“Assuming CDG’s exposure to UK/Ireland remains within the range of 16.5%-20.5%, a 10% depreciation in GBP against SGD is estimated to result in a 1.7%-2.1% decline in its total operating profit,” he said.

Janice Chua, analyst at DBS Vickers Securities also estimates that every 10% change in GBP will have about 1.7%-1.8% translational impact on CDG’s earnings forecasts. “Our current forecast assumes SGD2/GBP, and at current spot of around SGD1.85/GBP, this implies a 1.3% change to our forecasts, all else remaining constant. The impact is largely translational in nature as CD does not repatriate its profits. The group’s Singapore operations have been and, in our view, should continue to be able to meet dividends and cashflow requirements in Singapore dollars,” she said.