Courts Asia

UOBKayhian on 18 Feb 2014

VALUATION

• Maintain HOLD with a lower target price of S$0.62 (previously S$0.71), based on 1.2x P/B, which is at a 30% discount to the blended peer average of 1.7x. We switch our valuation method to P/B from PE and use an equally-weighted average of regional retailers and Malaysian credit companies to better reflect Courts Asia’s (Courts) business model. We think the P/B discount is justified given its lower ROE of 10% vs peers’ 13%. The negative outlook on regional consumption and regulatoryrisks in Malaysia and Singapore may continue to weigh on the stock but share buybacks could lend support to share price. Entry price: S$0.52.

INVESTMENT HIGHLIGHTS

• Malaysian sales higher on new store openings but organic growth still weak. In 3QFY14, Malaysia posted a 21% yoy increase in sales but we note this was largely attributable to its opening of one megastore and three superstores. Samestoresales (SSS) growth for the quarter was 2.8% yoy while sales per sf was flat at RM112. For 9MFY14, Malaysia sales were up 2.1% yoy. Despite management’s plan to continue with its aggressive expansion strategy, we remain cautious due toexpected lacklustre domestic consumption as Malaysians brace for the rising cost ofliving from various subsidy rationalisation measures. We are also concerned about cannibalisation effects for stores located within close proximity of each other.
• Singapore sales fell despite launch of Apple’s iPad Air in Nov 13. In 3QFY14, Singapore posted a 2.9% yoy decline in sales. Courts opened Courts Westgate in mid-Dec 13, its 15th store in the country and the second new store ytd after Courts JEM in Jun 13. SSS growth was -4.4% yoy with lower sales per sf at S$283. For 9MFY14, Singapore sales rose 3.4% yoy. Courts’ e-commerce business (eCourts) accounts for about 2% of Singapore’s top-line. On a calendar-year basis (2013 vs2012), it posted an 89% yoy sales growth after it was relaunched in Oct 12. However, eCourts remains unprofitable as it has yet to gain sufficient scale. Management believes Singapore’s retail environment will remain tough in the subsequent quarters. We also think Courts’ product segments face demand pressure as the government continues to reinforce its property-cooling measures.
• Some deterioration in performance metrics, notably its payable days have shortened to 56 (FY13: 59) while inventory days lengthened to 56 (FY13: 51) with inventory stock increasing 23%. Delinquency and impairment ratios improved for Malaysia after some internal tightening measures while Singapore’s deteriorated slightly due to payment delays on higher-value purchases. We saw some improvement in margins in 3QFY14 as credit sales picked up in Malaysia but on a ytd basis, the group’s net margin fell to 3.3% from 4.8% in 3QFY13. Besides a higher cash mix in FY14, Courts also recognised higher rental and depreciation expenses from its new stores.