Courts Asia - DBS Research 2016-11-10: Expect gradual earnings recovery

Courts Asia - DBS Vickers 2016-11-10: Expect gradual earnings recovery COURTS ASIA LIMITED RE2.SI

Courts Asia - Expect gradual earnings recovery

  • 2Q17 results above on lower operating costs.
  • Gradual earnings recovery on higher store network, cost control and better product margins.
  • Raise FY17-18F earnings by 7-8%.
  • Maintain BUY, TP S$0.50.



Maintain BUY on improving earnings outlook, attractive valuations. 

  • We maintain BUY on Courts Asia (Courts) with higher TP of S$0.50 and total return of 17% including dividends. 
  • We see earnings recovering on the back of better cost management and margins. 
  • Courts is on track to expand its store network in Indonesia and Malaysia, and is well positioned to ride on their expected GDP growth acceleration and consumer sentiment recovery in 2017. 
  • Valuation is compelling at 9x FY17F PE (near -1SD of its forward PE valuation) and 0.7x P/B. The stock also offers dividend yield of close to 4%.


Earnings recovery supported by more stores, controlled opex, and product margins. 

  • We see earnings recovery led by revenue growth from more new stores, sustained by cost controls and margins. 
  • Indonesia’s planned expansion to 9 stores by end of FY17F is moving according to plan, with store launches in Ciledug, Tangerang City, and Ciputat, South Tangerang. 
  • Malaysia is also on track to reach 70 stores by end of FY17F. 
  • In Singapore, cost control efforts and more favourable opex (marketing, advertising, head office costs) have led to improvement in operating profits. In addition, better merchandise margins will also sustain gross margins going forward.


Valuation

  • We maintain BUY as we continue to see value in the stock’s current valuations. 
  • Our target price is S$0.50, based on 10x blended FY17/18F PE, pegged to -1SD of its historical average valuation.


Key Risks to Our View

  • Interest rate increase and regional consumer sentiment. Courts’ credit business is sensitive to changes in interest rates. Interest rate increases would raise working capital financing costs, leading to lower credit yield spreads. 
  • As a regional retailer of consumer products, Courts is sensitive to wealth and domestic consumer sentiment changes in the markets where it operates.




Alfie Yeo DBS Vickers | Andy Sim CFA DBS Vickers | http://www.dbsvickers.com/ 2016-11-10
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.50 Up 0.450




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