Hard slog recovery
Without the booming Malaysia credit sales of early FY13, a return to stronger profitability looks like a hard slog. 3Q/9M14 profits made up only 19%/62% of our full-year estimates and 20%/65% of consensus due to poor margins. 3Q showed 1) a sequential recovery in Malaysia, after credit sales were reined in earlier, but 2) a 13% qoq decline in Singapore sales, albeit from a 2Q when new Apple products had inflated sales. Singapore delinquencies are rising. Management is cautious and views the Singapore retail outlook as weak. It is more optimistic on Malaysia. We cut FY14-16 EPS by 13-16% to factor in lower margins as credit sales drift lower. Our residual income-based target price is lowered to S$0.61. We maintain a Hold rating in the absence of a recovery.
Malaysia inches up in a slow recovery
9M14 profits were 29% lower because of a prior weak 2Q. FY14’s challenge had been lower credit sales in Malaysia (MY) but any credit problem in MY seems to have been resolved as MY had a 2.8% recovery in same-store sales, credit sales are rising again and delinquencies are stable. Courts’ credit recovery plan seems to be working well as it strikes a balance between growth and credit extension. MY’s recovery has been driven by 1) targeted promotions to garnermore sales from its better customers, 2) realignment of marketing efforts to the mass-market client base, and 3) new products like motorcycles. Management isoptimistic that MY will shoulder the burden of driving growth in 2014, despite inflation concerns potentially damping consumer sentiments.
Guiding more cautiously for Singapore (SIN) now
SIN SSS, however, slipped 4.4% and 3Q revenues fell 13% qoq. The qoq comparison looks bad because 2Q had been inflated by electronics sales on the back of new product launches. Management views a soggy retail environment in Singapore as challenging. Singapore delinquencies are also rising.
Catalyst not forthcoming for us to turn more bullish
Courts had an average S$10.4m/quarter profit run-rate in FY13 but for 9M14, the quarterly profit run-rate has slipped to S$6.8m. In an environment where consumer spending is slowing in its two markets and credit concerns can be an issue, our previous estimates look too aggressive. At our reduced estimates, thestock is not expensive at 9x FY15 P/E but lacks clear re-rating catalysts.
Publish date: 17/02/14