CIMB Securities 2015-08-13: Courts Asia Limited - 1Q16 Results; Malaysia the star this quarter. Upgrade to BUY.

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COURTS ASIA LIMITED RE2.SI

Malaysia the star this quarter 

• After five consecutive quarters of yoy profit declines, Courts looks to be turning a corner. 
• 1QFY3/16 net profit (+19% yoy) came in above expectations, at 35% of our full-year forecast and 31% of consensus. 
• The strong results came from positive growth in Malaysia and higher service charge income, mitigated by lacklustre Singapore sales and start-up losses in Indonesia. 
• Courts’s share price has fallen 21% over the last three months after persistent earnings disappointments, but we think its fortunes could be changing. 
• We lift FY16-18 EPS by 16-29% to factor in higher service charge income and our TP rises to S$0.45(still based on 9.6x CY16 P/E, 1 s.d. below mean). 
• Upgrade to Add. 

Sales in Malaysia positive but lacklustre in Singapore 

• 1Q16 group sales finally bucked the downward trend and grew 2% yoy, with Malaysia being the star (+5.4% yoy) but dragged down by Singapore (-2.4% yoy), as the residential market in Singapore remains lacklustre. 
• In constant currency terms, Malaysia sales grew an even stronger 11.8% yoy. This was mostly driven by an increase in earned service charge income (+15% yoy), where Malaysia’s retail environment favours credit purchases. Same store sales growth was +9.4% and -1.8% for Malaysia and Singapore respectively. 
• We read Malaysia’s results as especially strong given the backdrop of a post-GST climate, political uncertainty and a weakening ringgit, although these factors could also have bolstered credit sales. 

Higher service charge income flowed to bottomline 

• The higher service charge income in Malaysia also had a positive effect on margins. Courts achieved record gross margins of 34.5% in 1Q16 (4Q15: 33.8%; 1Q15: 32.7%). 
• Furthermore, various warehouse and distribution cost management measures were implemented in FY15 and are now showing up as operating margins improved to 7.4% (4Q15: 6.6%; 1Q15: 5.1%). 

Failed Mauritius bid could be a blessing 

• Management’s plans to enter a fourth market failed as its bid for Courts Mauritius was unsuccessful. However, we think that the failed bid is not too bad as it frees up cashflow to build up its infant Indonesian presence. 
• Courts currently has three stores in Indonesia, and will add a fourth in BSD City by Dec 15. 
• Indonesia’s losses are narrowing (S$2m in 1Q16 from S$2.4m in 4Q15), but will still need more stores before it achieves operational efficiency.

Kenneth NG CFA | Jonathan SEOW | http://research.itradecimb.com/ CIMB Securities 2015-08-14

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