Cut TP to SGD1.15. Courts Asia has seen its share price slump 24% in the past three months, vs 15% for its regional peers. Its share price is now 3% below the IPO price. In our view, Courts has been made a punching bag due to weakening consumer sentiment and rising concerns over household debt in ASEAN, particularly among the lower-income earners, as investors have ignored its proactive approach to tighten credit approvals since 4QFY3/13. Mindful that retail spending may be softening and the temporary closure of GEM store; we lower our FY3/14F-16F earnings estimates by 8- 15% and cut our TP to SGD1.15, pegged at a lower multiple of 14x (previously 16x).

Sell down overdone, still a BUY on sound fundamentals. We think the sell down on Courts has been overdone. Despite the cut in TP, we reiterate our BUY call on Courts, based on attractive valuations at 9x FY3/14F PER, proactive measures to tighten credit approvals and positive growth engines in the pipeline.

Quick to act to tighten credit approvals. Recent reports showed that household debt as a percentage of GDP has reached 75% in Singapore and 81% in Malaysia. Unsurprisingly, banks have tightened their consumer credit policies. Though Courts’ credit accounts make up just a small proportion of individual household debts, the group has been quick to act, slowing credit approvals since 4QFY3/13. This has helped mitigate the risk of loan collection, particularly in Malaysia. Margins may thus be affected but the move is better than a spike in default rates.

Weaker consumer sentiment. Management concurred that consumer sentiment in Malaysia is softening, as evidenced by poorer retail sales data reported for the second quarter, as well as the incoming subsidy rollbacks directly impacting consumer discretionary counters. We also expect the closure of GEM which accounts for 5% of Singapore store GFA to have an adverse effect on sales in the 2nd half of FY3/14

Long-term investment conviction. While the macroeconomic conditions paint a grim picture, we remain optimistic that Courts will still be able to deliver stable earnings growth with new stores opening according to schedule. The group’s first store in Sabah opened two weeks ago. Management is standing by its store growth target of 19% YoY for this year, vs. 5% last year, with the bulk of the expansion occurring in Malaysia.

Source: Maybank Kim Eng Research - 20 Sep 2013