Key takeaways from luncheon. We hosted a luncheon for Courts Asia’s CEO Terry O’Connor this week which was well-received by institutional investors. Following an introductory briefing on Courts’ evolvement and past problems, investors grilled them on current market positioning, plans for Indonesia, and its liquidity issue. We continue to view its ambitions to expand regionally in a positive light. Our TP remains the highest on the Street at SGD1.49 (Buy) on this under-researched stock.

The past and the present. In the past, Courts had operations in Indonesia, Thailand, Singapore and Malaysia, where it had struggled with overexpansion and poor credit control. Now, management has centralised its credit system to make it independent of the country heads and refocused on credit quality control and collection, rather than aggressive credit recognition. Right now, 65% of sales in Malaysia and 10% of sales in Singapore are credit sales, with respective bad debt levels at their lowest in 5 years at 4.2% and 2%. When the quality of credit was questioned, management emphasised that the receivables placed in Malaysia’s SPV had to be rated triple-A quality to be accepted. To counter this, Courts has recently proposed establishing a SGD500m multicurrency debt program to expand on its credit drawdown at more favourable rates, depending on the risk appetite of investors.

Indonesia’s potential reemphasised. Growth prospects were a hot topic during the luncheon and management highlighted that the strongest growth is expected to come from Indonesia, then Malaysia. Previously, Courts had operated in various parts in Indonesia, and although it remained profitable, it was not where consumer spending was strongest. This time around, Courts will only be focusing on one high consumption region – Jakarta. It will be opening outlets predominantly around Bekasi to fully utilise its joint warehouse with a Megastore store expected to open in 2014. Management expects this to break even within two years.

Liquidity issue. Currently, SRG holds 68.2% of Courts, with the remaining 29% the free float. Of this, institutional investors such as JF Asset Management, New Silk Road, Target Asset Management and Value Partners Hong Kong together held 13.9% of the shares at the IPO offering. We expect Barings Equity to place out small blocks to free up liquidity, while retaining a majority share to benefit from Courts’ regional growth.

Source: Maybank Kim Eng Research - 24 Apr 2013