Courts Asia

Phillip Securities Research, Nov 14

COURTS Asia is a leading electrical, IT products, and furniture retailer in Singapore and Malaysia. It also offers in-house credit facilities, generating additional revenue for the retailer. The company will be expanding to Indonesia, with the opening of a Megastore in Eastern Jakarta by FY2015.

Courts reported Q2-2014 earnings of S$7.2 million, -55 per cent lower y-o-y, but 1.6 per cent higher q-o-q. Singapore's Q2-2014 sales were 10.8 per cent higher y-o-y due to bulk sales of lower margin, older model, of digital products in preparation of new launches.

Malaysia's sales were, however, affected by credit tightening measures, which led to a -16 per cent decline in like-for-like credit sales. Sales in Malaysia decreased 11.0 per cent (8.3 per cent in local currency terms) due to single-digit growth in cash sales.

While the change in sales mix led to lower gross profit margins, we continue to be positive on the Singapore segment of the business. The launch of new products, increase in spending ability, population growth and completion of new housing units are expected to continue to drive higher sales growth. We are, however, concerned over the Malaysian segment.

We had previously forecast higher credit sales due to higher demand for credit facilities, while credit cost should remain low as Courts is able to choose its borrowers.

The new megastore in Malaysia is experiencing a slow start.

The Megastore is not in line with Courts' current branding in Malaysia thus making it in a disadvantageous position.

A high 8 per cent to 10 per cent of Malaysia standalone stores are on their watchlist, causing a drag on profitability.

We adjust our forecast to include Q2-2014 results, lowering FY14E net profit after tax by 23 per cent. Based on our discounted cash flow valuation, we derive a target price of S$0.71. Based on our concerns over Malaysia, we think more visibility is needed.

We downgrade Courts to "neutral" and remove it from our "Deep Value Play" list.

NEUTRAL