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

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.

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.

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