DBS Vickers 2015-08-15: Courts Asia - 1Q16; Macro headwinds. Maintain HOLD.


Macro headwinds 

  • 1Q16 earnings in line with expectations. 
  • Limited downside with dividend yield at 4.5% and valuations at around -1.5SD of its mean. 
  • Weak regional consumption demand underpins challenging outlook. 
  • Maintain HOLD with lower TP S$0.35. 


Earnings within expectations. 

  • 1Q16 net earnings of S$6m (+19% y-o-y) were in line with our expectations. Revenue came in at S$198m (+2% y-o-y), driven by earned service charges in Malaysia but dragged by lower cash sales in Singapore. 
  • SSSG for Malaysia was 9.4% while Singapore’s SSSG was a negative 1.8%. 
  • Gross margins improved 0.7ppt largely due to better sales mix of higher margin Electrical and IT products. Opex was lower as a proportion of sales on lower distribution and marketing expenses, through better warehouse and distribution management in Malaysia. 


Challenging outlook. 

  • We believe weak macro environment underpins a soft outlook ahead with weak regional consumption. Malaysia’s consumer sentiment index has fallen to 71.7, the lowest since 2008 while the Malaysian ringgit is at a 20-year low against the Singapore dollar. Inventory will need turn faster in order to match previous years’ sales. 
  • With the exception of February, retail sales for furniture and household equipment in Singapore continued to underperform last year. There has been a recent downward revision of the higher-end GDP growth estimate by the Ministry of Trade and Industry from 4% to 2.5% after 1H15’s weaker than expected GDP growth. This will put more pressure on Singapore’s sales which were down 2.3% y-o-y for the quarter. 


Maintain HOLD with lower TP of S$0.35. 

  • We maintain our HOLD recommendation as we anticipate headwinds going forward, but do not see much downside to the stock since valuations are at -1SD of its mean and the stock yields 4.5% dividends. 
  • Although our estimates are unchanged, we lower our target price to S$0.35, based on a lower 10x FY16F PE peg. This is to factor in a weaker demand outlook and more challenging operating environment in the region. 
  • We derive our 10x multiple based on a 15% discount to peer average of 12x including OSIM and Padini. 

Key Risks: 

Interest rate increase. 

  • Courts’ credit business is sensitive to changes in interest rates. Increases in interest rates would increase working capital financing costs, leading to lower credit yield spread on its balance sheet. 

Regional consumer sentiment. 

  • Courts retails consumer products regionally. The business is therefore sensitive to wealth and domestic consumer sentiment changes in the markets it operates in.

Alfie YEO | Andy SIM CFA | http://www.dbsvickers.com/ DBS Securities 2015-08-14
HOLD Maintain HOLD 0.35 Down 0.45