Courts Asia -
Hold (from Buy)
Share price: SGD0.70
Target price: SGD0.72 (from SGD1.07)
Poor Results, Turnaround Delayed
Seasonally strong quarter disappoints. 1HFY03/14 results made up 34% and 30% of our and consensus estimates, respectively. The earnings drag came from deteriorating consumer sentiment in Malaysia (hit by fuel subsidy cuts and more stringent credit measures on individuals by Bank Negara Malaysia) and an unfavourable shift in product mix in both Singapore and Malaysia. With the earnings outlook expected to stay challenging, we slash our FY03/14-16 estimates by up to 37%. Our revised TP of SGD0.72 is based on a lower target PER of 12x (from 14x) to reflect a weaker earnings growth profile. We cut our rating to HOLD.
1HFY3/14 earnings dive 37.2% YoY. Revenue rose 2.5% YoY to SGD420m, while net profit plunged 37.2% to SGD14.2m. Like-for-like sales growth remained weak: Singapore registered a 1.6% drop excluding export sales, while Malaysia recorded a 12.8% fall on weaker credit sales. Two stores were closed against four store openings in Malaysia. Courts declared an interim dividend of 0.76 ct/share this quarter, or 1.1% yield.
Hit by various issues. Courts attributed the weak results to: 1) action to tighten its internal credit policies post more stringent regulatory changes in Singapore and Malaysia; 2) weaker consumer sentiment; and 3) a change in product mix with more lower-margin products such as electronics being sold.
Earnings turnaround delayed. The imposition of tighter regulatory policy on individuals and the fuel subsidy cuts should continue to hamper discretionary spending in Malaysia. The impending implementation of sales and services tax in Malaysia (from 2015) is also expected to dampen sales in Malaysia. This augurs ill for Courts. Positive catalysts: 1) a revival in consumer sentiment in both Singapore and Malaysia; and 2) relaxation in internal credit policies by Courts.
Valuation looks expensive. The stock is expensively priced at 13.7x FY03/14 EPS with negative EPS CAGR of 2.3% over FY03/13-16. That said, we think share price should be well supported by its recentlyinitiated share buyback scheme (can buy up to 65m shares).
Publish date: 14/11/13