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

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.

Doing fairly well in a still challenging sales environment 

  • 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.

GPM sequentially weaker, but still above historical levels 

  • 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%).

Better cost structure 

  • 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.

Indonesia still not up to scale, to breakeven in two years 

  • 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).

Credit collection in check 

  • 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.

Maintain Add 

  • 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 | 2016-11-09
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.60 Up 0.530