Tuesday, November 19, 2013

Courts Asia : Downgrade on concerns over Malaysia (Phillip)

Courts Asia Limited
Target Price (SGD) 0.71
Closing Price (SGD) 0.695
Downgrade on concerns over Malaysia

 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.

• 2Q14 NPAT disappoint at S$7.2m, -55% lower y-y.
• We have concerns over its operations in Malaysia, including Megastore performance, Lower credit sales.

• Downgrade to “Neutral” with TP of S$0.71, based on DCF valuation, and remove from “Deep Value Play” list.

What is the news?
Courts’ reported 2Q14 earnings of S$7.2m, -55% lower yoy, but 1.6% higher q-q. Singapore’s (SG) 2Q14 sales were 10.8% higher y-y due to bulk sales of lower margin, older model, of digital products in preparation of new launches. Malaysia’s sales were however affected by credit tightening measures, which lead to a -16% decline in like-for-like credit sales. Sales in Malaysia decreased 11.0% (8.3% in local currency terms) due to single-digit growth in cash sales.

 How do we view this?
While the change in sales mix led to lower Gross Profit margins, we continue to be positive on the SG segment of the business. The launch of new products, increase in spending ability, population growth and completion of new housing units are expected to continue to drive higher sales growth. We are however concerned over the MY segment. 1) Like-for-like credit sales sharply down -16% for 6M14. We had previously forecasted for higher credit sales due to higher demand for credit facilities, while credit cost should remain low as Courts is able to choose its borrowers. 2) New megastore in MY experiencing a slow start, 3) The Megastore is not in-line with Courts’ current branding in MY thus making it in a disadvantageous position, and 4) A high 8%-10% of MY standalone stores on their watch-list, causing a drag on profitability.

Investment Actions
We adjust our forecast to include 2Q14’s results, lowering FY14E NPAT by 23%. Based on our DCF valuation, we derive a TP of S$0.71. Based on our concerns over MY, we think more visibility is needed. We downgrade Courts to “Neutral” and remove it from our “Deep Value Play” list.

We have concerns over the operations in Malaysia
1. Like-for like credit sales sharply down 16% in 6M14 – NPAT forecast lowered on lower sales, lower earned service charge
Management has guided for prudence, thus decreasing credit sales volumes. This is in-line with Bank Negara Malaysia’s focus on promoting a sound and sustainable household sector. This has also contributed to the low delinquency rates (7.9%), and lower allowance for impairment loss on trade receivables (4.8%) required. While current household debt levels are high, we note no systemic credit quality concerns with regards to consumer lending in Malaysia. Employment prospects remain stable. We adjust our forecast to take into account the lower credit sales, which makes up approximately 54% of total sales in Malaysia. Given the high interest margins of est. 20% (est. 27% interest income, 6.6% interest expense), this also lowers our net profit forecast for the next few years.

2. New Megastore experiencing a slow start
Sri Damansara Megastore was opened on 20 Jul 2013. Management guide for the Cash mix to be 70%-80% of sales (Credit mix 20%-30% of sales), as compared to 6M13 45.6% cash mix for the average sales mix in Malaysia. Despite the higher cash mix, cash sales psf was however guided to be not massively higher as compared to the stand alone stores. This implies for sales psf to be substantially lower (est. 35% lower sales psf compared to stand alone stores), despite promotional activities potentially have boosted sales during the opening of the new megastore. We recognize that the cost psf for the megastore is lower due to factors such as lower rental expenses, but think that the volume of sales should be substantially higher given the higher focus on cash sales, as compared to the higher-margin credit sales. We think more visibility on the performance of the Malaysia megastores (2nd Megastore to open in Dec 2013) is needed for the next six months.

3. Megastore may not be in-line with current branding
We note that Courts now has a larger presence near KL. Management have previously guided that Megastores are preferred due to advantages including having a larger range of goods, and unique retail concepts and multichannel features. However, the branding for Courts in Malaysia, unlike that in Singapore, has likely been towards the mid to lower end of the market, due to the higher emphasis on credit purchases. This focus may likely make the Courts Megastore at a disadvantage as some customers, who prefer cash purchases, may not frequent Courts. While comparisons to hypermarkets like “Giant” has been made, we note that Courts is a seller of bigger ticket-size item, as compared to that of more basic necessities. Once again, more visibility is needed over the next six months.

4. 8%-10% of Malaysia’s stand alone store on watch-list
Management guide that 2 stand alone stores were closed this quarter. These stores were loss-making, even without taking into account overhead expenses (e.g. headquarter expenses). Management also guided for a further 5 to 6 stores that were also on their watch-list, as these stores were occasionally loss-making. These stores, which represent 8%-10% of the stand-alone stores in Malaysia, however are profitable when credit sales are higher. Based on management’s current stance to decrease credit sales, we think that these stores are likely to be loss-making in the near term, thus causing a drag on profits.

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-Research,
Publish date:14/11/13

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