Sunday, August 18, 2013

Courts Asia : Decent set of results, Longer term play (Phillip)

Courts Asia Limited
Target Price (SGD) 1.03
Closing Price (SGD) 0.89
Decent set of results, Longer term play

 Company Overview
Courts Asia is a leading electrical, IT products, and furniture retailer in Singapore and Malaysia. Courts Asia also offers in-house credit facilities, generating additional revenue for the retailer. Courts Asia will be expanding to Indonesia, with the opening of a Megastore in Eastern Jakarta by FY2015.

• 1Q14 results decent with earnings of S$7.0 million.

• Continue to be positive on unique credit offering, strong expansion plans. Near term drag on profits expected.
• Maintain “Buy” with new TP of S$1.03, based on DCF valuation, assuming 6.9% WACC, and 3.0% terminal g.

What is the news?
Courts’ reported 1Q14 earnings of S$7.0 million. Geographically, sales in Singapore grew high single digit ex-export sales with the re-launch of Courts Megastore Tampines and Toa Payoh branches. Export sales are estimated based on popular goods likely exported to foreign countries where these goods may not be available. In Malaysia, adverse impact from the recent election campaign and Courts’ deliberate tightening of credit approvals led to lower sales. This credit tightening was taken to reduce future credit cost, amid uncertainty in the Malaysian economy. Expansion plans remain on track, including a 2nd “Big-box” Megastore in KL, Malaysia, to open by Dec 2013.

 How do we view this?
Courts continues to expand significantly across Singapore, Malaysia and Indonesia. We note a short term drag on net profit as newly opened stores in Malaysia takes time to gain traction in terms of sales volume. Total Sales volumes were unfortunately weaker in 1Q14 with the lack of popular new launches. Management expects to leverage off its centralized offices to reduce cost as it opens more branches countrywide. Once the stores mature, we expect higher profit margins as efficiencies are optimized.

Investment Actions
We adjust our forecast to include 1Q14’s results. Based on our DCF valuation, WACC of 6.9%, and 3.0% terminal g, we derive a new TP of S$1.03. We continue to be positive on Courts based on its unique credit offering, and strong expansion plans. We therefore maintain our “Buy” rating.

Malaysia’s Megastore expansion focused near KL
Management believes that Megastores near Malaysia’s capital, Kuala Lumpur, present high opportunities from high sales. In particular, this would mostly be cash transaction. With the launch of the Megastore in Sri Damansara (See Fig 4) in Jul 13, and the upcoming Megastore in Subang Jaya in Dec 13, (See Fig 4), Courts now has a larger presence near KL. Megastores are preferred due to advantages including having a larger range of goods, and unique retail concepts and multichannel features.

Rapid expansion however leads to short term drag
While expansion is expected to increase sales volumes and net profits in the medium to long term, Courts continues to face short term earnings drag. First, newly opened stores in Malaysia take some time to gain traction as customers are slower to warm up to stores. Second, there is a short term increase in interest expense as management effectively utilizes proceeds from the recent S$125m bond issuance. The higher capital is required to fund expansion plans, including in Indonesia. Third, efficiencies are likely to be lower for new stores due to higher percentage of new staff relative to mature stores. This is especially so given the higher dependence on staff to increase credit sales, and lower credit cost. This is through experience in picking out credit customers that are more likely to default via tell-tale signs, such as their actions.

Key concerns
1. Potential credit losses in Indonesia
Courts Indonesia is expected to be operational in CY2014. We remain concerned with credit risk during the initial starting phase, due to a lack of database on customers’ credit quality. Management has highlighted measures such as cooperating with other companies to create a balance scorecard on potential credit customers, and lowering maximum loan tenures to reduce risk. High impairment losses in Indonesia will affect overall profitability.

2. Rise in unemployment rates may increase bad debts
As wages are typically used for repayment of credit, an increase in unemployment rates will reduce the customer’s ability to pay off their credit loans. This will result in higher loans allowance, and thus reducing net profits. However, we expect unemployment rates to remain low in the near term.

Source/Extract/Excerpts/来源/转贴/摘录: Phillip Securities Research
Publish date:14/08/13

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