Courts Asia

DBS Group Research Equity, Aug 13

Q1 2014 sales grew 2 per cent y-o-y to S$197 million while earnings grew 5 per cent to S$7 million. Revenue growth was driven by the Singapore market (+2 per cent y-o-y to S$137 million), supported by the relaunch of Courts Megastore Tampines (Dec 12) and Toa Payoh (March 13) branches.

Malaysia registered flat growth as store sales declined 2.5 per cent due to the haze and election campaigns, compensated by a 5 per cent increase in service charges.

Same store sales growth (SSSG) in Singapore and Malaysia shrank by 0.9 per cent and 4.2 per cent, respectively.

Gross profit margins increased 0.5 percentage points to 30.6 per cent due to higher service charge income and better sales mix towards higher margin electrical and furniture products.

Operating expenses as a percentage of sales declined mainly due to reduced advertising rates. Net debt stood at S$145 million or 0.5 times net gearing ratio. Q1 2014 earnings made up 14 per cent of our full-year initial estimates, in line with a mid-teens historical average.

Courts opened its first Big Box in Malaysia in July and is scheduled to open three more stores by the end of this year - two small-format stores in Sabah by September and a second Big Box store in Subang Jaya by December.

It has also secured a second Big Box site in Jakarta, targeted to open six months after the opening of its first Big Box in Bekasi in eastern Jakarta.

Following the decline in SSSG in Singapore and Malaysia, we trim our FY2014 and FY2015 earnings forecasts by 7 per cent and 3 per cent respectively. Q1 earnings tend to be seasonally low due to the absence of festive periods.

We expect a seasonally stronger quarter in Q2 2014, backed by new store openings and stronger sales during the Hari Raya period.

Having factored in slightly lower earnings expectations, our target price based on 13 times FY2014 forecast PE is lowered accordingly to S$1.05. We maintain a "buy" for 17 per cent upside.

BUY