What is the news?

Courts’ reported 1Q14 earnings of S$7.0 million. Geographically, sales in Singapore grew high single digit ex-export sales with the re-launch of Courts Megastore Tampines and Toa Payoh branches. Export sales are estimated based on popular goods likely exported to foreign countries where these goods may not be available. In Malaysia, adverse impact from the recent election campaign and Courts’ deliberate tightening of credit approvals led to lower sales. This credit tightening was taken to reduce future credit cost, amid uncertainty in the Malaysian economy. Expansion plans remain on track, including a 2nd “Big-box” Megastore in KL, Malaysia, to open by Dec 2013.

How do we view this?

Courts continues to expand significantly across Singapore, Malaysia and Indonesia. We note a short term drag on net profit as newly opened stores in Malaysia takes time to gain traction in terms of sales volume. Total Sales volumes were unfortunately weaker in 1Q14 with the lack of popular new launches. Management expects to leverage off its centralized offices to reduce cost as it opens more branches countrywide. Once the stores mature, we expect higher profit margins as efficiencies are optimized.

Investment Actions

We adjust our forecast to include 1Q14’s results. Based on our DCF valuation, WACC of 6.9%, and 3.0% terminal g, we derive a new TP of S$1.03. We continue to be positive on Courts based on its unique credit offering, and strong expansion plans. We therefore maintain our “Buy” rating.

Source: PhillipCapital Research - 14 Aug 2013