Courts Asia - Tracking expectations
- 3Q17 results in line, weak revenue offset by higher margins.
- Outlook driven by store expansion and better gross margins.
- Maintain BUY, TP S$0.51 on 10x FY17/18F earnings.
Maintain BUY on attractive valuations.
- We maintain BUY on Courts Asia (Courts) with TP of S$0.51.
- The company is on track to post core earnings growth of 30% y-o-y on the back of better cost controls, stronger gross margins and lower interest costs.
- Courts’ store network expansion plans in Indonesia and Malaysia are progressing well, and will benefit from the expected acceleration in GDP growth, and consumer sentiment recovery regionally in 2017.
- Valuation is compelling at 8x FY18F PE (near -0.5SD of its historical forward PE valuation) and 0.7x P/B. The stock also offers dividend yield of 3.8% for FY17F.
Earnings recovery supported by more stores, product margins.
- Earnings recovery would be led by revenue growth from more new stores, effective cost controls and sustainable improvement in margins.
- Indonesia’s planned expansion to nine stores by end of FY17F is on track, having opened its Bogor Trade Mall store in December 2017.
- Malaysia is also moving towards its target of 70 stores by the end of FY17F after opening its Semenyih Store in December.
- Courts is increasing its bundled services offerings (currently at 6-7% of sales), a bolt on value added service for installation, setup, delivery, extended warranty for electrical, furnishing and IT products sales. This helped gross margins to expand in FY17F. The success of this service should help to support higher gross margins going forward.
- We maintain BUY as we continue to see value in the stock’s current valuations.
- Our target price is S$0.51, 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.