Courts Asia - CIMB Research 2017-06-29: Improved Profitability Driven By Singapore

Courts Asia - CIMB Research 2017-06-29: Improved Profitability Driven By Singapore COURTS ASIA LIMITED RE2.SI

Courts Asia - Improved Profitability Driven By Singapore

  • Courts adopted new accounting standards this quarter, which effectively lowered reported revenue and profits, making comparability to our forecasts irrelevant.
  • Reported FY3/17 core net profit (S$23.7m) therefore came in below our FY17 forecast of S$25.2m or at 94% of our estimate.
  • The retail environment is still soft but the big positive is its Singapore operations where EBIT doubled on the back of better margins, driving group NP to +248% yoy.
  • Final DPS of 1.29 Scts declared, c.4% yield intact.
  • We tweak our earnings, mostly to reflect the new accounting standards. But our Target Price remains unchanged at S$0.60 (still based on 10.2x CY18 P/E, -1 s.d.).

Adoption of new accounting standards distorted FY17 

  • Courts prudently adopted a new accounting standard this quarter (FRS115 Revenue from Contracts with Customers) which would become mandatory effective Jan 2018, and also reclassified certain expense line items. The net impact was a massive 67% drop in FY16’s restated net profit. 
  • The significant impact from the new accounting treatment means comparability to our forecasts is now irrelevant. Nonetheless, we read FY17’s strong 248% yoy growth in reported net profit positively.

Improved profitability entirely driven by better margins 

  • Overall, retail sales are still weak across both its key Singapore and Malaysia markets.
  • FY17 revenue fell 1.5% yoy. This was not unexpected and the group continued to push its margin initiatives which are showing up in the numbers. 
  • Main drivers for the strong net profit growth include 
    1. better gross margins due to higher earned service charge income and higher merchandise margins (FY17: 36.3%; FY16: 33.8%), and 
    2. lower financing costs. Accordingly, FY17 PBT margins improved to 4.3% (FY16: 1.6%).

By geography, Singapore was the best performer 

  • By country, Singapore saw the biggest yoy improvement and was the star performer. Singapore’s FY17 EBIT improved 94% yoy, driven by higher OPM (FY17: 7.3%; FY16: 3.6%). 
  • Malaysia was a small negative (FY17 EBIT -3.6% yoy), dragged down by higher impairment and also a weaker RM. Malaysia’s FY17 sales would have been +1.6% yoy in constant currency terms vs. its reported -3.1%. We will be concerned if the impairment charges in Malaysia escalate.

Indonesia still loss-making but is a longer-term play 

  • The group has come a long way since its first store in Indonesia in 4QCY14 and now operates nine stores, but management acknowledges this is still below optimum. Hence, Courts is still in a store expansionary mode and management’s target is to breakeven in two years (i.e. FY19F). 
  • The positive is that the incremental start-up costs from new stores have been mitigated by the gradual gestation of older stores. FY17’s S$11m loss was reasonable (FY16: -S$8m). We remain positive on Courts’ initiatives in Indonesia.

Dividend yield of c.4% cushions downside risk 

  • Courts remains a fairly cash generative business. An unchanged final DPS of 1.29 Scts was declared, which translates into an attractive c.4% yield.

Valuations, yield and improved cost structure reasons to be bullish 

  • With the stock trading at 6-7x forward P/E, valuations are undemanding relative to its historical mean of 11.5x. The stock also offers a c.4% yield and earnings growth has returned, driven by a leaner cost structure. Hence, we keep our Add rating with an unchanged S$0.60 Target Price. 
  • The improving property sentiment in Singapore could also spark demand for its products. 
  • Risks: higher-than-expected credit costs.

Jonathan SEOW CIMB Research | 2017-06-29
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