Courts Asia - CIMB Research 2016-05-27: Some gloom, not all doom

COURTS ASIA LIMITED RE2.SI

Courts Asia - Some gloom, not all doom

4QFY3/16 net profit (S$4.2m or US$3m) was within ours and market expectations.
Retail environment remains difficult. SG 4Q sales -3% yoy, MY sales -16% yoy, albeit comparing against a high 4Q15 base, on the back of pre-GST buying then.
The flipside is that various cost items are also receding, helping the company cope.
Target price rolled forward to S$0.49 (still 9.6x CY17 P/E, -1.s.d. of trading range). Valuations are not demanding, question is if structural threat of online retail is real. (Maintain ADD).

Sales were always going to be difficult, with:
1. a weak retail climate in Singapore and Malaysia well-publicised,
2. previous guide that a review of their stores was plausible; and
3. the Mar 16 quarter being a difficult yoy comparison in Malaysia as 4QFY3/15 was inflated by pre-GST buying.
In this light, 4Q sales decline (-6% yoy) was palatable.
Bottomline was kept in the black by cost control and lower interest charges. Quarterly profit was stable sequentially. FY16 net profit was in line at 100% of our forecast.

In Singapore, FY16 sales were -3% yoy. 4Q same-store-sales growth (SSG) is -3.9% yoy. The retail environment is tough, mitigation is that rents have room to be negotiated down and that is happening.
Court’s prior investments in supply chain logistics have also helped reduce inventory days, cut down aged inventory and support margins.
Credit sales (FY16: 8.3% of total, FY15: 7.9%) are rising, but default rates are low and stable.

In Malaysia, FY16 sales rose 7.8% yoy. 4Q SSSG was -1.3% yoy amidst an equally soft environment.
Malaysia sales actually did well in FY16, attributed to a recent re-branding initiative.
4Q yoy comparison is flawed as 4Q15 saw a blip in pre-GST buying (GST on 1 Apr 15). Credit sales (40.4% of total) are also rising, belying the presence of cash- strapped consumer. But, default rates have improved to Singapore’s rates.
Out of five stores that negotiated lower rents recently, two are in Malaysia, three are in Singapore.

Indonesia generated a loss (-S$8.3m) in FY16, partly a function of a soft economy, partly due to sub-scale operations. Courts still intends to expand in Indonesia but has modified its strategy, opting for more stores in smaller sizes.
Management has guided that breakeven in FY18 is more realistic, as scale benefits start to become clear.

A difficult retail environment is well-known. Courts has focused on cost management and costs are coming down in several areas:
1. A focus on inventory management has helped reduce obsolescence costs, support margins.
2. Rents are coming down as landlords accede to negotiations.
3. Advertising costs are easing in traditional media.
4. Finance costs are coming down, as currency mismatches have been aligned.

Valuations are undemanding, management appears to have done all the right things in a difficult environment. The question is whether deeper challenges abound for brick-and- mortar retailers like Courts. It has addressed this with strategies to differentiate product online vs. physical channels, and also drive their e-channel sales.
We cut FY17-18 EPS forecasts on lowered sales.
Downside risk to call is any unexpectedly large credit losses.

Jonathan SEOW CIMB Securities | Kenneth NG CFA CIMB Securities | http://research.itradecimb.com/ 2016-05-27

CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 0.49 Up 0.42