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Duty Free International Ltd’s Latest Earnings: Earnings Pain from Currency Swings

Duty-free retail chain Duty Free International Ltd (SGX: 5SO) had announced its fiscal second-quarter earnings (for the three months ended 31 August 2015) yesterday evening.

The quarter hasn’t been kind to the company. Here’re the things to note.

Financial and business highlights

For the quarter, Duty Free International experienced a 9.7% year-on-year increase in sales to RM 149.98 million. This was mainly due to an increase in the volume of sales and also new contributions from its newest outlets at the Kuala Lumpur International Airport 2 which opened only in November 2014.

But, that healthy top-line growth was basically undone by big jumps in foreign exchange losses and higher rental expenses. All told, Duty Free International saw a 21.2% drop in its quarterly net profit to RM9.46 million compared to a year ago.

The appearance of foreign exchange losses for Duty Free International, a company that operates only in Malaysia and which reports in the the Malaysian ringgit, might seem weird.

But, roughly 57% of the company’s purchases are denominated in other currencies (mostly the US and Singapore dollar), according to its annual report for the fiscal year ended 28 February 2015 (FY2015). Moreover, the company had also used derivatives contracts to lock in its purchase prices. So, when the ringgit weakened against the US dollar and Singapore over the past year, foreign exchange losses were logged.

For the half-year ended 31 August 2015, the results were better. Sales increased by 9.3% year-on-year to RM 289.6 million while net profit had inched up by 0.7% to RM 24.0 million.

But, for investors in Singapore, the numbers can still be considered as disappointing. Duty Free International’s earnings per share for the first-half of FY2015 was RM2.16, which at that time translated to around S$0.85. The EPS for the first-half of FY2016 is RM 2.18, but due to the falling ringgit, is worth only S$0.735.

For an investor in Singapore, where dollar-denominated figures are more important, Duty Free International’s earnings in the first-half of FY2016 have actually dropped by 13.5% year-on-year.

Foolish Summary

Duty Free International’s experience highlights a very real and often disregarded currency risk when it comes to investing in Singapore-listed companies with overseas operations.

Despite being able to grow in its reporting currency, from a Singaporean investor’s point of view, the company’s earnings had actually dropped. This is something worth noting when you are deciding to invest in any foreign businesses, especially ones in less developed markets with volatile currencies.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.