COURTS ASIA LIMITED
RE2.SI
Courts Asia - 1QFY17 earnings beat on Singapore strength
- 1QFY17 net profit (+56% yoy) significantly outperformed expectations, forming 39%/40% of our/Bloomberg consensus FY3/17 forecasts.
- Seasonality played a part as pre-Hari Raya sales were higher yoy in 1Q17 (Hari Raya timing was later last year) but higher credit sales played a bigger role.
- Operational costs were kept under control and margin improvement contributed to the 1QFY17 earnings outperformance.
- We tweak FY17-19F EPS by -0.4% to 2.8% for strong 1QFY17 results but remain cautious on post-festive slowdown. This lifts our TP slightly to S$0.50. Maintain Add.
1QFY17 yoy sales decline reflected soft retail environment
- 1QFY17 revenue fell 0.9% yoy, reflecting the still-soft consumer sentiment in Singapore and Malaysia.
- We view the slight decline as especially weak because Hari Raya timing was earlier this year, which brought forward festive buying to 1QFY17.
- Singapore sales were down by a marginal 0.3% yoy but Malaysia sales were up 1.7% yoy (constant currency terms) in 1QFY17.
- Overall, 1QFY17 topline was nothing to shout about.
However, better mix of higher-margin credit sales in 1QFY17
- However, there was a much higher proportion of credit sales in Singapore in 1QFY17 compared to 1QFY16, which we believe led to better profitability in Singapore.
- Singapore EBIT doubled yoy to S$10m in 1QFY17. The last time Courts Singapore EBIT reached this level was in 2013, when consumer spending was much higher than now.
Gross margin (GPM) helped by supplier rebates
- Another factor that played a part in significant 1QFY17 earnings outperformance was the supplier rebates. We note that merchandise margins were higher yoy in 1QFY17, which was in part due to Courts building up inventory for the festive periods (Great Singapore Sale, Hari Raya).
- Accordingly, 1QFY17 GPM was at a record high of 36.1% (vs. historical average of 33%). However, we are cautious about the sustainability of this high GPM, as leftover inventory is typically discounted after the festive periods.
Keeping costs in check
- In response to the tough retail environment, we commend management’s efforts to control costs and improve productivity. These efforts include subleasing existing floor space, more targeted A&P spending and being more rigorous on hiring needs. The effects of certain efforts have already flown through to the bottomline, albeit in a small way.
- Management also shared that there is now more room to negotiate for lower rent, especially in Malaysia, where it is not afraid to walk away from stores.
Concerns about the credit quality
- Management expects credit collection in Malaysia to be challenging and is putting in place measures to minimise its risk.
- In our view, this is not yet cause for concern as delinquency rates and impairment losses are still at healthy levels, with some improvement in 1QFY17.
Reiterate Add
- We merely tweak our EPS forecasts despite the earnings outperformance, as we remain cautious on possible post-festive slowdown. As a result, our target price rises slightly to S$0.50, still based on 9.6x CY17 P/E (1 s.d. below historical mean). Maintain Add.
- Downside risks include unexpectedly large credit losses.
Jonathan SEOW
CIMB Research
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http://research.itradecimb.com/
2016-08-12
CIMB Research
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