Courts Asia - DBS Research 2016-05-30: Strengthening operations

Courts Asia - DBS Research 2016-05-30: Strengthening operations COURTS ASIA LIMITED RE2.SI 

Courts Asia - Strengthening operations

  • 4Q16 earnings below as Courts undergoes destocking exercise; otherwise FY16 largely in line
  • Raise FY17-18F earnings by 1-6% on clearer earnings visibility
  • We see Courts as a potential privatisation play
  • Maintain BUY, TP S$0.45

Current valuations are attractive. 

  • We remain positive on Courts as its current share price offers good value. 
  • FY16 results were encouraging, with earnings growing by 22%, marked by a turnaround in Malaysia. Yet its share price is trading at only 7.2x FY17F PE and 0.6x FY17F P/B (both around -1SD of respective mean levels), and offers 4.6% dividend yield. There is clearer earnings visibility now that its balance sheet, credit book, inventory positions, and operating costs have strengthened. 
  • We see opportunity for upside as we believe current valuations have underpriced the stock’s outlook. 
  • Besides, 73% of Courts is owned by private equity shareholders, we believe Courts is a privatisation candidate given current valuations.

Visible earnings outlook. 

  • Based on our estimates, earnings outlook is strong, backed by store count expansion in Singapore, Malaysia and Indonesia, while margins (including rentals and cost efficiencies) have room for further improvement. 
  • More importantly, Courts’ credit book is now healthier as impairment stands at a 2-year low. This puts it in a more favourable position to drive more credit business. 
  • We have raised our FY17-18F earnings by 1-6% on the back of stronger financials and better earnings from credit sales.


  • We maintain BUY as we continue to see value in the stock’s current valuations. 
  • Our target price is S$0.45, based on 10x FY17F PE, pegged to -1SD of its historical average valuation.

Key Risks to Our View:

  • Interest rate increase and regional consumer sentiment. Courts’ credit business is sensitive to changes in interest rates. 
  • Interest rate increases would raise working capital financing costs, leading to lower credit yield spreads. As a regional retailer of consumer products, Courts is sensitive to wealth and domestic consumer sentiment changes in the markets where it operates.

Alfie Yeo DBS Vickers | Andy Sim CFA DBS Vickers | http://www.dbsvickers.com/ 2016-05-30
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.45 Up 0.44