Courts Asia Limited - MANAGEMENT REPLY: Will Malaysian same-store sales return to growth?

[Adds management replies]

7/7/2014 – Courts Asia's share price is trading 27% below its listing price of S$0.77 in October 2012, but brokers continue to remain bullish on the stock after its FY14 results.

DBS Vickers Research maintained its BUY rating and target price of S$0.70 as it believes that the stock is trading at attractive valuations.

CIMB Research has upgraded the stock from HOLD to ADD with a target price of S$0.69 as it expects earnings from Malaysia and Indonesia to grow.

In Singapore, Courts Asia expects demand for home furnishings and electronics to increase after the completion of an unusually large number of HDB flats in 2014 and 2015.

The Government is expected to deliver 28,000 HDB units this year, which is more than double the 13,600 units completed in 2013.

In Malaysia, it opened its second ‘Big Box’ Megastore in Subang Jaya in January 2014, which should begin to contribute to earnings in FY15.

It will also open one new store in Kuala Krai, Kelantan in the current quarter, Q1 FY15.

Maturity of new stores and Big Box Megastores, and a more aggressive Hari Raya advertising campaign will contribute to the group’s revenue and profit in FY15.

The group's first Big-Box megastore will open in Bekasi, Indonesia by Q2 FY15, and it plans to have three stores operational during 2015.

The company just announced earnings for FY14:

Revenue: +4.6% to S$830.3 mln
Profit: -31.6% to S$28.3 mln
Cash flow from operations: (S$7.6 mln) vs (S$2.5 mln)
Dividend (Q4): 0.76 cents per share vs 1.01 cents per share

Singapore’s sales grew 4.4% mainly due to higher bulk sales of digital products and higher electrical sales contributed by air systems and major white goods categories.

Sales were boosted by two new stores, JEM and Westgate, which opened in June 2013 and December 2013 respectively.

Malaysia’s sales increased 5.1% mainly attributable to higher credit sales from a successful credit campaign launched during the year.

The opening of six new stores also contributed to overall growth.

Several factors contributed to a decline in net profit this year.

It spent S$2 mln on migrating to Navision, a new ERP system.

Pretax and net profit were also negatively impacted by an S$800,000 transition cost due to a change in its third-party logistics service provider and another S$900,000 of pre-operating expenses in Indonesia.

CEO Terence O’Connor says these expenses will result in cost savings, productivity and improved customer service.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. Can we expect same store sales to grow more meaningfully in FY15?

Same store sales growth in Singapore was 12.1% in FY12, 9.4% in FY13 and 3% in FY14.

In Malaysia it was 1.4% and 5.9% but it fell 1.1% in FY14.

You can’t rely on new stores to drive sales because the capital expenditure and fixed costs are going to eat into profit.

Management Reply: Due to Courts’ electrical and IT retail nature, sales growth is partly affected by the bulk sales during periods of new IT product launches and may vary from year to year. As such, these factors will cause same store sales growth to fluctuate.

Question

2. Is it wise to keep expanding in the curt economic climate?

In Singapore, the total debt servicing and higher down payment requirements laid down by the Monetary Authority of Singapore (MAS) are affecting Courts' sales.

In Malaysia, cuts in subsidies for sugar and fuel have already made Malaysians unhappy because prices were raised, and could make them more price sensitive.

Property cooling measures in both markets would suggest sales of furniture and electrical items will level off.

These don’t sound like the conditions during which you would want to keep opening new stores.

Management Reply: Courts’ strategy remains focused on the long-term fundamentals of the business and believes that it is not wise to be overly distracted by the short-term economic headwinds.

Management recognises that Singapore is a mature market and as such, has a target of expanding one store per year compared to Malaysia's six stores per year due to Malaysia’s higher growth potential. With the bumper crop of new HDB flats totalling 28,000 to come on stream in Singapore this year, expanding the store network prudently would be an appropriate step in capitalising on the opportunities. Courts believes that the long-term fundamentals of Singapore remain intact although the general retail scene is affected by the short-term effects of the TDSR framework and property cooling measures.

Malaysia is a large geographical area where despite Courts' presence, it remains an under penetrated market. Furthermore, Malaysia has favourable long-term prospects with its attractive demographics with a growing economy.

Management continues to constantly monitor the economic climate and will review the situation while taking a balanced and measured approach towards expanding its store footprint with a long-term horizon in the business despite challenges in the short-term.

Total number of questions in the full story: 11)

We thank Tammy Teo, Regional Head of Strategy Planning & Communications, and Citigate, PR agency, for their response.

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