Courts Asia - CIMB Research 2016-11-09: Growing profits with improved cost structure

COURTS ASIA LIMITED RE2.SI

Courts Asia - Growing profits with improved cost structure

2QFY17’s net profit (S$6.7m, +11% yoy) was slightly ahead of expectations, 1H formed 65%/67% of our/consensus FY17F.
Sales was fairly muted (-3% yoy) as the retail environment remained challenging. This was in line with expectations.
The positive is Courts continues to benefit from cost efficiency measures. The lower SG&A and tax credits from Indo’s losses more than mitigated the sales decline.

Our TP rises to S$0.60 as we roll forward to CY18F and adjust for share buybacks.

Retail sales in a challenging macro environment is difficult but Courts’ sales actually showed resilience. Sales in Singapore remained relatively flat (+0.5% yoy) while Malaysia reported a 12.9% yoy decline (a better -9% in constant currency terms).
In the context of an unforeseen recall of the Samsung Note 7 and Hari Raya timing differences which brought forward some festive buying to 1QFY17, we view the group’s 2Q 3% sales decline as highly commendable.

2Q’s GPM of 33.9% might look weak, especially after 1Q’s record high GPM of 36.1%.
However, we note that 2QFY17 carried lower earned service charge income in Malaysia and unfavourable sales mix from higher corporate sales. We also suspect there could have been an element of post-festive discounting. Nonetheless, these are still healthy levels (2-yr historical average GPM was 32.9%).

The bright spots were in better overall cost controls. Going down the line, distribution expenses/sales were down 0.3%pt yoy due to lower ad spend and better warehouse management in Malaysia.
Admin expenses/sales were also down 0.2%pt yoy, which was even more impressive given that occupancy costs were higher as the group opened new stores in Indonesia and Malaysia. Lower finance charges and tax credits helped further.
Overall, we think the company now operates on a much leaner cost structure.

Sales in Indonesia was up 70% yoy in 2Q on the back of contributions from new stores but is still loss-making. Indonesia has been generating quarterly losses of S$2m-3m over the past 8 quarters and we attribute this to both start-up costs and sub-scale operations.
Going forward, Courts is still targeting more store openings and management has guided breakeven in two years (i.e. FY19).

We note that management first brought up credit collection concerns in 1QFY17 and cited economic uncertainties as possible headwinds. However, we still do not see any red flags.
Reported delinquency rates and impairment losses are still at reasonable levels and remain fairly unchanged.

We lift our FY17-19F EPS by 3% on slightly better margins. However, our TP rises by a larger magnitude as we roll forward to CY18F and after we adjust for further share buybacks. Our TP is now S$0.60 (based on 10.2x CY18 P/E, still based on -1s.d. level).
Downside risks include unexpectedly large credit losses. Maintain Add.

Jonathan SEOW CIMB Research | http://research.itradecimb.com/ 2016-11-09

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