Friday, 15 August 2014

Courts Asia

Kim Eng on 15 Aug 2014

  • Retail environment in Singapore and Malaysia sluggish, due to poor consumer sentiment.
  • Rising expenses, partly linked to Courts’ regional expansion.
  • Three new stores in Indonesia by end-FY3/15. Profits expected only from 2016. Maintain HOLD with TP of SGD0.52 (10x FY15E P/E), after transfer of coverage.
Demand in key markets weak
Courts continues to encounter difficulties in its key markets. Malaysia sales were flat in 1QFY3/15, despite six new stores and aggressive marketing. Courts plans to open another 6-8 in FY3/15E, mainly in East Malaysia, to spread its central costs and achieve scale. Singapore demand is also weak, as sentiment has been dampened by a new total debt servicing ratio for consumers since Jun 2013. Courts will open its first store in Indonesia in Sep 2014, though it expects a profit only from FY3/16E.

Earnings pressure points
We believe Courts’ attempts to revive demand in its key markets will further pressurise its earnings, short term. Its migration to a new ERP system may also bite into its margins in the next few quarters. There may also be higher personal expenses in Singapore, due to recent government requirements for foreign workers.
We have new EPS forecasts and a new TP of SGD0.52, set at 10x FY15E P/E, after our transfer of coverage. This represents a 20% discount to valuations for Malaysia-listed AEON Credit Service, as Courts’ 3-year EPS is lower and we do not see immediate growth catalysts. Maintain HOLD.

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