Courts Asia - CIMB Research 2016-02-15: All about driving efficiency in tough markets

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COURTS ASIA LIMITED RE2.SI 

Courts Asia - All about driving efficiency in tough markets 

• 3QFY3/16’s net profit (S$4m, flat yoy) was in line. 9M formed 80% of our FY16 forecast. We expect a muted retail environment in the near-term. 
• Courts Malaysia outperformed the retail climate with sales growth of 20% yoy (constant currency terms), but this was lost in translation due to a weaker ringgit. 
• 3Q PBT was up a strong 26% yoy, but net profit offset by higher effective tax rates. 
• We lower our FY17-18 EPS forecasts on higher tax rate assumptions, and our target price falls to S$0.42. 

■ 3Q net profit hampered by higher tax rates 

• Group sales growth (+6% yoy) was mostly due to higher bulk sales of digital products in Singapore. 
• Earlier cost saving measures meant improved operating margins, and PBT was up 26%, but net profit (S$4m, flat yoy) was offset by higher taxes. 
• There were some one-off tax provisions in this quarter, but a higher tax rate is expected as regulatory changes mandated certain costs to no longer be tax deductible. 

■ Singapore still weak, but boosted by bulk sales of digital products 

• In Singapore, Courts is still reeling from the hangover of a lacklustre residential market and debt servicing ratio. 
• While total Singapore sales finally bucked the trend of six consecutive quarters of yoy declines (+8% this quarter), this was mostly due to higher bulk sales of digital products (Apple-related). Excluding which, like-for-like sales growth would have declined 5% yoy. 
• Management’s tone on sales growth was not optimistic, but profit contribution should be supported by an easing rental market and cost control. 

■ Malaysia operationally strong, but lost in translation 

• Malaysia continues to do well and has been lifting the group’s results. 
• Total Malaysia sales rose 2% yoy and an even stronger 20% on a constant currency basis. Malaysia now makes up 64% of group earnings (ex-Indonesia losses). 
• Taken in the context of 
  1. subdued consumer spending with a weakened ringgit, 
  2. GST implementation, and 
  3. closure of non-performing stores, 
  the 20% constant currency topline growth clearly outperformed the industry and enhanced market share. 

■ Focusing on cost-savings to navigate a muted retail environment 

• Management was honest about the tough retail environment across all its markets. The reality is Singapore can only do better when the residential market improves. 
• The softer consumer sentiment in Malaysia and Indonesia also means that the group will remain selective in store openings. 
• The focus is on improving productivity – one way being subletting existing floor space. 

■ Maintain Add, stock is trading below -1 s.d. 

• We cut our FY17-18 EPS by 10% to factor in higher effective tax rates, offset by share buybacks. Our target price (based on 9.6x CY16 P/E, -1 s.d.) falls as a result. 
• While the retail environment is expected to remain tough, Malaysia continues to deliver strong earnings. 
• Management also highlighted that it can now negotiate for lower rents. 
• Other catalysts include the lifting of cooling measures and Indonesia turning profitable. 

Jonathan SEOW CIMB Securities | Kenneth NG CFA CIMB Securities | http://research.itradecimb.com/ 2016-02-15

CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 0.42 Down 0.46