Trouble in Malaysia
▊ Deteriorating consumer sentiment in Malaysia and a shift in product mix in Singapore have depressed Courts' profitability. We are more worried about the slowdown in Malaysia as its woes in Singapore look transitory. 2Q14 EPS came in below, meeting 15% of our full-year estimate and 17% of consensus – while 1H14 EPS formed just 30% of our forecast. We slash our EPS estimates by 27-29% to reflect lower sales in Malaysia and lower profits in Singapore. We also raise our discount rate from 8% to 9%, leading to a huge decline in our residual income-based target price. We downgrade Courts to Neutral from Outperform.
Net profit fell 55% yoy, largely driven by an EBIT decline of S$8.7m (-37% yoy) due to different woes in Malaysia and Singapore. In Malaysia, sales were affected by poor consumer sentiment due to the government’s efforts to rein in household debt as well as reduction in fuel subsidies. Credit sales fell by 20% yoy and SSSG fell by 20% yoy. As a result, Malaysia’s EBIT contribution in 2QFY14 slid by S$1m (-14% yoy). Singapore saw a more severe drop in EBIT contribution of S$7m (-40% yoy) despite strong SSSG of 15.8% due to lumpy export sales, as the product mix shifted from furniture to lower margin digital products. Although the impact from the drop-off in Singapore is greater, we are less worried about this as there is a high chance that the product-mix change is transient. Note that 2Q saw the launch of the new iPhone.
Malaysia slowdown more worrying
Malaysia’s slowdown could continue to weigh on consumer spending in the next few quarters. Management has taken steps to preserve credit quality and Courts' loan portfolio has shown no signs of deterioration so far. NPLs in Malaysia came in at 7.9%, better than 1Q’s 8.6%.
Downgrade to Neutral
As its share price has fallen 30% YTD, we think that most of the negatives have been priced in. An interim dividend of S$0.76 was declared.