COURTS ASIA LIMITED
RE2.SI
Courts Asia - Courts in Malaysia: All rise!
- 2QFY3/16’s earnings beat expectations, with 1H16 at 60% of our FY16 forecast.
- Malaysia remains the group’s star performer, with sales growth (+27% yoy in constant currency terms) especially strong given the current weak retail climate.
- Higher service charge income compensated for the slowdown in Singapore.
- Our EPS and target price rise due only to share buybacks.
Continue to show signs of a turnaround
- 2QFY3/16’s earnings growth of 253% yoy continues to point toward a turnaround. We first turned positive on Courts after its 1QFY16 results, when the group registered its first positive earnings growth after five consecutive quarters of yoy declines.
- This quarter follows a similar tune to 1Q:
- strong showing in Malaysia,
- higher service charge income improving margins, mitigated by
- weakening Singapore sales.
Malaysia (35% of sales) boosted by bulk sales of digital products
- Across all metrics, Malaysia continues to be the star performer. Topline grew a healthy 13% yoy, and an even stronger 27% yoy in constant currency terms. Like-for-like sales (RM terms) also grew a strong 25.4% yoy. Management attributed the growth to higher bulk sales of digital products (Apple products in particular).
- While management declined to provide a breakdown, we remain positive on the overall trend and reliance, if any, on Apple given Apple’s growing popularity and new product launches every year.
Sales in Singapore (63% of sales) remain lacklustre
- Sales in Singapore continue to be on a downward spiral, with 2Q16’s 2.6% yoy decline its sixth consecutive yoy decline. Like-for-like sales declined by a bigger 4.2% yoy. We think Courts’ problems in Singapore do not only stem from a muted retail climate, but also from changing consumer trends.
- Management notes the need to rejuvenate retail concepts and is introducing new store-in-store concepts (JYSK and Ace Hardware), although the success of these initiatives remains to be seen.
Overall earnings boosted by higher service charge income
- Ex-Indo losses, Malaysia contributed 69% of operating income vs. Singapore’s 31% due to the higher proportion of credit and service charge income in Malaysia (cash/credit mix in Malaysia is historically ~30/70 vs. Singapore’s ~80/20).
- There was a big spike in cash sales this quarter in Malaysia, primarily due to the bulk sales of digital products which were mostly in cash.
- Nonetheless, 2Q16’s gross margins improved to 35.3% (1Q16: 34.5%; 2Q15: 32.7%).
Maintain Add, on valuations and improved
- Malaysia operations We retain our forecasts despite 2Q’s strong results as we remain cautious on the slowdown in Singapore. However, our EPS and target price (still based on 9.6x CY16 P/E, 1 s.d. below mean) rise (to S$0.46) due to share buybacks.
- While the retail climate in Singapore looks muted, Courts has delivered strong earnings in Malaysia. Indonesia also remains a wild card, with management planning to operate nine stores by end CY16 (currently 3) which will help achieve operational efficiency.
- Maintain Add.
Kenneth NG CFA
CIMB Securities
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Jonathan SEOW
CIMB Securities
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http://research.itradecimb.com/
2015-11-09
CIMB Securities
SGX Stock
Analyst Report
0.46
Up
0.45
