Exchange Rate Benefit

OK – I will have a crack – I can only be wrong.

From my research (not from the accounts or from SRX) I have a financial year average (14/15) exchange rates of .8364 A/US and .6962 for the Euro. Lets assume these rates were used by SRX for the conversion of results (P&L) to Australian dollars. Do not confuse this with actual rates used for receipts/payments or balance sheet (year end) conversions.

So far this year the average rates for US dollars are .7408, .7301 and .7055 for the months of July, August and Sept respectively. So for the 1st qtr the average exchange rate is .7255. This equates to a 13.3% decrease compared to the 14/15 rate. If this was to stay at this level for the rest of the year then there is a $18.2m benefit (page 83 of this years annual report says a 15% reduction equals a $20.5m* benefit - so I have just done a pro rata).

Using the same logic for the Euro we have a .6524 average rate for the 1st Qtr. This equates to a 6.3% benefit – or $2.0m (pro rate page 83).

So if exchange rates stay at .7255 (US) and .6524 (euro) then SRX will get a free hit to the Australian $ reported numbers of $22.5m. This is clearly a worst case scenario as the current rates are approx .70 US and .62 euro. Lets assume for the next nine months rates stay at the current levels then the full year average rates will be .7064 and .6281. This would equate to a benefit of 15.5% and 9.8% for the US and Euro respectively against prior year. Pro rata this means a $21.2m & $3.2m benefit.

So overall if exchange rates stay the same as they are today then SRX will get a benefit of $24.4m. Staggering when you think the Profit last year was $40.3m.

But wait there is more! Is there is anyone out there who thinks the $A will stay where it is today? Lets assume it does not move against the Euro but declines to .65c against the US by December this year - and stays there. That would make the average rate approx .6764. This would add an additional $4.9m to the exchange benefit. So Imagine that - a $29.3m benefit just because of the falling A$.

So what am I doing wrong? A $29.3m benefit is approx 50 cents a share. While it would be absurd to multiply this by the PE ratio (42) I would have at least thought the share price today would reflect this significant benefit more than it currently is. So is the rest of the investment world a bunch of nuff nuffs and I am a legend (an underappreciated one I will quickly add). Or am I the nuff nuff and I need a good lie down. Interested in anyone’s thoughts.

*Note – not clear if this is pre or post tax but have assumed post.

Cheers

SLC4ME