Tuesday 25 March 2014

Courts Asia

Kim Eng on 24 Mar 2014

  • Courts Singapore turns 40 and intends to push ahead with brand building and expansion despite the retail slowdown. 
  • Stock has underperformed since our SELL call in Dec 2013. But value is starting to emerge, with its credit book value almost equivalent to its market cap.
  • We think credit sales in Malaysia are picking up again and margins will improve. Upgrade to HOLD.
Push for brand building and differentiation
Following the independent listing of Courts Asia in 2012 we sense that the management team led by Mr Terry O’Connor has been more committed than ever to the company’s success. Our main reservation is the lack of opportunity for it to differentiate itself in electronics retailing. But on this front, we are encouraged that it is headed. For example, the company is launching a brand-new “World of Wellness” concept to tap into rising health awareness. In Malaysia, Courts Asia is primarily a credit business. We believe the company has relaxed its lending rules, which would result in sales recovery in the subsequent quarters. Margins also should be enhanced given that interest income is a big profit driver.

Upgrade to HOLD
Courts Asia currently has a gross credit book of SGD540m. Given its history of prudent credit control and good collection, we believe this sum is largely intact and think value is starting to emerge for the stock. We raise our FY14E-16E earnings estimates by 2-3% and our TP stays at SGD0.60, pegged to 10x FY15E P/E. This is a steep50% discount to the regional retailers but roughly in line with similar credit businesses in Malaysia. Upgrade to HOLD.

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