Courts Asia (COURTS SP) HOLD (Downgraded)

Share Price S$0.695

Target Price S$0.71

Shares issued (m): 559.1

Weak 2QFY14: Key Takeaways From Results Briefing

Valuation

Downgrade to HOLD and lowered target price to S$0.71 based on a peer average PE of 13.5x applied to our reduced FY14F EPS estimate of 5.2 S cents for Courts Asia (Courts). We think negative sentiment on the stock will remain until the company delivers improved sales and puts forward a sustainable strategy for its credit business. Suggested entry at S$0.60/share.

Key Takeaways

 Sluggish product sales excluding bulk sales of digital products same-storesales growth (SSSG) are -1.6% and -12.8% ytd for Singapore and Malaysia respectively. With the lack of new IT product launches in 2QFY14, there was no catalyst to push Singapore?s sales higher. Malaysia was also hit by weaker consumer sentiment as the government began clamping down on household debt and the macro environment turned less optimistic. The country?s central bank (CB) downgraded its GDP forecast to 4.5-5% for 2013 vs 5-6% earlier. Retail spending has been slowing down, based on figures compiled by Retail Group Malaysia.

 Tightening the credit belt squeezed out high-margin credit sales. In line with the respective CB?s credit tightening measures, Courts also initiated more risk management controls internally. While this limited the group?s top-line growth (2QFY14: +3.3% yoy) and hurt margins (2QFY14 gross margin of 28% vs 34% in 2QFY13), it helped management maintain decent impairment ratios of 3% and 4.8% ytd for Singapore and Malaysia respectively. To mitigate the lost sales in Malaysia (credit sales declined 16% ytd for existing stores), Courts launched a Credit Recovery Plan, which primarily entices its best credit customers with more benefits and incentives, to increase purchase activity. While management?s prudence and long-term mindset are positives, we think the pressure on margins will weigh on investor sentiment.

 Near-term headwinds are dampeners forecasts revised downwards. The challenging retail and credit picture led us to cut our FY14-16F earnings projections by 18-38%. New stores in Malaysia will only provide profit contribution after 2 years of operation. We also see the market adjusting their margin expectations lower as the group?s credit business is reined in to a more conservative state. While operating expenses were well-managed ytd, we could see a slight uptick in the succeeding quarters on pre-operating expenses for its new-store pipeline.

 Making room for Indonesia?s 2 ?Big-Box? outlets, 10 stores in the next 5 years. These stores will be located within Jakarta and will allow for economies of scale in the city. Management expects the breakeven period for its Indonesian stores to be 2 years and has secured new borrowing facilities in light of the certain additional working capital requirements. Overall, the group had an available headroom of S$540m as at end-Sep 13. We have also turned cautious on prospects in Indonesia due to slower economic growth, higher political risks (2014 presidential elections), higher operating costs and stiffer competition. We note that Ace Hardware Indonesia has signalled that there will be slower store expansion in 2014 on the back of these concerns.

Price Chart

Source: BloombergFinancials

Year to 31 Mar (S$m) FY12 FY13 FY14F FY15F FY16F

Net Turnover 724.2 793.8 832.8 875.7 954.2

EBITDA 70.3 78.6 62.0 80.3 88.0

EBIT 62.5 68.8 53.2 69.5 76.4

Net Profit 39.4 41.4 29.3 40.3 45.8

EPS (S cent) 7.9 7.8 5.2 7.2 8.2

PE (x) 8.8 8.9 13.3 9.6 8.5

P/B (x) 1.6 1.3 1.3 1.2 1.1

Dividend Yield (%) 0.0 1.5 2.3 3.1 3.5

Net Margin (%) 5.4 5.2 3.5 4.6 4.8

Net Debt to Equity (%) 65.2 46.7 68.9 65.1 62.5

Interest cover (x) 4.9 4.5 3.7 4.2 4.6

ROE (%) 18.0 14.3 9.4 12.0 12.4

Source: Courts, Bloomberg, UOB Kay Hian

Market cap (S$m): 388.6

Market cap (US$m): 311.0

3-mth avg t'over (US$m): 0.8