Courts Asia

UOBKayhian on 14 Aug 2013

Valuation

• Maintain BUY recommendation with a reduced target price of S$1.14 based on a peer-average PE of 13.5x applied to our FY14F EPS estimate f 8.5 S cents.

Key Takeaways

• Lack of new IT product launches in 1QFY14 hurt Singapore’s sales, which resulted in a same-store sales growth (SSSG) of -0.9%. However, excluding bulk sales of IT products, Singapore registered a strong SSSG of 7.6% on the back of stronger sales of electrical goods (due to the haze). We expect IT sales to rebound in 2HFY14 on the back of a potential new product release from Apple on 10 September.
• Continued improvement in Malaysia’s credit profile despite weaker top-line growth. Malaysia’s sales grew 1% yoy in 1QFY14 with SSSG at -4.2% due to the recent election campaign and the impact of the haze. However, allowance for impairment loss on receivables improved to 5.1% (1QFY13: 5.8%, FY13: 5.3%) on the back of the group’s deliberate tightening of its credit policy after the government recently imposed controls on household debt. We see this positively impacting the group’s bottom-line. Credit sales as a percentage of Malaysia’s total sales remained steady at 54% in 1QFY14.
• Cost optimisation, operating leverage benefits kicking in with EBITDA margin improving to 8.1% in 1QFY14 (1QFY13: 7.5%). Operating expenses rose 2.3% yoy on higher rental costs, depreciation charge, staff cost and pre-operating expenses incurred for Indonesia. This was partially offset by a decline in advertising expense. Management expects to continue capturing better economies of scale in Malaysia.
•  Expansion on track with the group completing its nationwide retail coverage in Malaysia after it secured four new sites ytd in FY14 (two bigbox, two small-format stores). It targets an additional four small-format stores for the rest of FY14 to maximise supply chain efficiency. In Indonesia, Courts’ strategic partnership with Sinar Mas Land will drive its immediate presence in the new market. Already confirmed are two bigbox stores, both located in Jakarta, to be opened within six months of each other. The first store will have its groundbreaking ceremony in Sep 13 and will be operational by next year.

Earnings Revision

• We trim our FY14 earnings estimate by 5% after adjusting for lower SSSG but higher store count, and higher finance costs. We expect a stronger 2QFY14 on the back of the Hari Raya season. Our FY14-15F

projections will be driven by new store openings and improved economies of scale.