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Courts Asia (COURTS SP) Summary

Core Content

Courts Asia (COURTS SP) is a Singapore-based consumer discount retailer with a current share price of SGD0.36 and a target price of SGD0.36 (unchanged). The company operates in Malaysia, Indonesia, and Singapore, and faces challenges in its core markets despite some recent operational improvements.

Main Market Performance

• Malaysia:

  • Sales in 1QFY3/16 increased by 5.6% YoY, driven by a successful credit campaign and store makeovers.
  • However, the positive effect is expected to be offset by a weakening MYR, leading to only 2.7% YoY growth in FY3/16 in reported currency.
  • Operating profit is forecasted to grow by 23% YoY, reaching 11.4%, due to margin expansion from credit sales.

• Singapore:

  • Sales have declined for five consecutive quarters, with no sign of revival.
  • The company is focusing on new retail concepts and partnerships to improve sales, but results remain weak.
  • Sales are expected to be flat in FY16, with potential gradual improvement starting in FY3/17 if initiatives prove successful.
  • HDB plans to release 26,000 flats this year and 25,000 per year from 2016-2018, which could bring some demand for Courts' products, but the impact is uncertain.

• Indonesia:

  • Sales are growing, with an expected break-even point in 3QFY3/16 following the opening of its second Megastore in Greater Jakarta.
  • The company is looking to open a fifth store in this market.
  • Sales are expected to grow by 4–6% YoY from FY16–18E, with net profit increasing faster due to margin expansion.

Financial Highlights

Key Initiatives and Performance

• Margin Improvement:

  • Courts has implemented initiatives to improve profitability, including store makeovers, innovative retail concepts, and new credit products.
  • Gross margins have remained above 32% since 3QFY14, with a forecast of reaching 33.1% by FY18.
  • The company is focusing on high-margin product categories such as electrical and furniture to drive sales and margins.

• Credit Campaign:

  • The Flexi Home credit product was launched in 1QFY3/16 and contributed to higher service charge income and improved margins.
  • The campaign was more proactive compared to previous SMS-based strategies, leading to increased credit sales.
  • The positive impact is expected to last for the next 1–2 quarters, but will be offset by the weak MYR.

• Store Refurbishment:

  • Courts is refocusing on store makeovers and re-launches rather than expansion.
  • In FY3/15, the company opened and relocated six stores, while closing four underperforming ones.
  • Plans to refurbish 15 stores in FY3/16, with fresh retail concepts and sales team overhauls.

Analyst Outlook

• EPS Forecasts:

  • FY16–18E EPS forecasts have been cut by 5–25%, reflecting weaker sales in core markets.
  • The target price of SGD0.36 is based on a 9x FY17E P/E ratio, aligning with the historical 3-year P/E average.

• Overall Outlook:

  • Courts is expected to be a 2016–2017 story, with potential for gradual improvement.
  • Despite improvements in previous quarters, headwinds in core markets may mitigate progress.
  • The company is maintaining a HOLD recommendation due to these challenges.

Summary of Key Points

• Sales in Malaysia have improved slightly, but are expected to be flat in FY16 due to MYR depreciation.
• Singapore sales remain weak, with no sign of improvement.
• Indonesia sales are growing, with a potential break-even point in 3QFY3/16.
• Gross margins are expected to improve to 33.1% by FY18.
• The company is focusing on store makeovers and credit initiatives to improve performance.
• The target price remains unchanged at SGD0.36, based on a 9x P/E ratio.
• Analysts maintain a HOLD recommendation due to ongoing market challenges.