Courts Asia - DBS Research 2015-10-29: Clouded by consumer pessimism

COURTS ASIA LIMITED RE2.SI

Courts Asia - Clouded by consumer pessimism

We maintain our Neutral stance on the stock as we believe the share price will trend sideways.
We see limited downside since forward PE valuations are attractive at - 1.5SD of its mean. However, we do not see significant upside from the weak macro environment that underpins soft outlook ahead.
Outlook should remain unexciting as regional consumption is weak and growth outlook is expected to be less buoyant than before.
Our recent GDP growth downgrades in Asean validate this view.

We believe outlook will be challenging as poor consumer sentiment will be a key dampener to sales and earnings growth.
While the stock is trading attractively at 10.9/9.2x FY16F/FY17F PE, the challenging growth environment will cap any potential upside to the stock.

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.
With the exception of February, retail sales for furniture and household equipment in Singapore continued to underperform last year's.
Indonesia’s consumer confidence has hit its lowest in the last five years at 97.5 in September.

We maintain our HOLD recommendation as we see earnings bottoming out, but are cautious on regional demand going forward.
Our target price is S$0.35, based on 12x FY16F PE.

Interest rate increase and regional consumer sentiment.
Courts’ credit business is sensitive to changes in interest rates. Increases in interest rates would raise working capital financing costs, leading to lower credit yield spread on its balance sheet.
Courts retails consumer products regionally.
The business is therefore sensitive to wealth and domestic consumer sentiment changes in the markets where it operates.

Alfie Yeo DBS Vickers | Andy Sim DBS Vickers | http://www.dbsvickers.com/ 2015-10-29

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