Friday, July 19, 2013

Singapore Mid-cap Highlight: Courts Asia (UOBKH)

Singapore
Mid-cap Highlight: Courts Asia

CAL remains an attractive proxy for consumerism in Singapore and Malaysia. Its plan to venture into Indonesia in 2014 is on track. We see the recent correction as an opportunity to accumulate. BUY with a target price of S$1.20.

What’s New
• Key takeaways from management meeting. We met with the management of Courts Asia (CAL) recently. This report highlights the key takeaways.


Key Takeaways
• Background on CAL. CAL is Singapore’s largest and Malaysia’s second-largest electrical, IT and furniture retailer in terms of 2011 total sales. The “Courts” brand is associated with quality products at affordable prices. Under the “Courts Flexi Schemes”, CAL operates a proprietary credit business, which allows customers to make purchases through credit accounts opened directly with CAL. In adition, CAL holds branding rights to operate in 16 other countries in Asia-Pacific.

• First “big-box” megastore in Malaysia opened. CAL soft opened its largest store in Malaysia last 11 July, ahead of the original August target and in time for the start of the festive Hari Raya season. The official opening is scheduled for 20 July. This raises the total store count in Malaysia to 61 and total retail area to close to 960,000sf. Management intends to add another 100,000sf in FY14 through 5-6 stores. We are positive on the outlook for Malaysia’s retail sector, which is driven by a large middle-class segment. Retail Group Malaysia has upgraded their 2013 growth forecast for the retail industry from 6.0% to 6.4%.

• Short-term impact from BNM’s credit tightening… Bank Negara Malaysia (BNM) recently announced measures to tighten household financing mainly by capping loan tenures, prohibiting pre-approved personal facilities and regulating non-bank financial institutions (NBFI). While CAL does not qualify as an NBFI, these measures could indirectly curtail CAL’s credit business as the government aims to control excessive household debt. Credit sales as a percentage of Malaysia’s total sales has trended down to 57% as at end-FY13. Management is comfortable with this current mix and revealed that this is in line with the company’s tightening credit policy to manage risk. We prefer the credit sales proportion to remain above 50% in Malaysia for CAL’s overall gross margin to remain above 30%.

• …but long-term impact is positive. We think BNM’s new measures will complement CAL’s internal risk management in the medium/long term. CAL employs scorecard-based criteria when it conducts credit checks on its customers. Also, it engages external credit agencies such as DP Information in Singapore and Rating Agency Malaysia Credit Information to enhance its screening process. A stronger financial framework in Malaysia will institute more responsible lending and borrowing practices, which in effect will improve CAL’s credit risk profile.

• Accelerated housing pipeline to support furniture sales in Singapore. According to MND, more than 30,000 residential units are expected to be completed this year and close to 200,000 until 2016. We expect this to support CAL’s furniture sales, which comprise close to 20% of total product sales. CAL has introduced innovative concepts to boost this product category, including Sleep Clinic and Sofa Maker.

• Entering Jakarta in 2014. CAL is in advanced discussions with the developer of its first store in Indonesia. This will be CAL’s biggest store ever with a total retail area of almost 140,000sf. Its corporate office is now fully operational as management plans for successive store openings in Jakarta to gain economies of scale. The group did not provide a forecast for the sales per-square-foot for its store but using the average figures from other existing retailers (such as Lotte and Giant), management believes sales could average S$250psf (vs Malaysia’s ~S$200psf). The company has identified Indonesia as one of its key markets, along with Malaysia, in driving its revenue in the mid to long term given the growing middle class and fragmented retail market.

Earnings/Risks
• Seasonally weaker 1QFY14. The first quarter of CAL’s fiscal year is typically weaker due to the absence of festive holidays. 2QFY14 should generate stronger sales on the back of the Hari Raya season. We expect CAL’s FY14 revenue and earnings to grow 23% and 21% yoy respectively, driven by new store openings and higher sales per-squarefoot. On a three-year horizon, we forecast an earnings CAGR of 15%.

• Key risks. In our view, key risks that could hinder CAL from hitting our earnings forecasts include: a) higher impairment losses in the event of rising consumer defaults, b) weakening consumer demand for CAL’s non-essential products, and c) narrower margins on lower credit sales.

Valuation/Recommendation
• Maintain BUY with a target price of S$1.20. We applied a peer average PE of 13.5x to our FY14F EPS estimate of 8.9 S cents.



Source/Extract/Excerpts/来源/转贴/摘录: UOB Kay Hian research
Publish date: 18/07/13

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