Negatives factored in. We hosted a NDR with Courts to confirm our views on the retail scene in Singapore and Malaysia. We believe the share price has already priced in overall weakness in demand in the past quarter. We have cut our FY14F earnings by a further 8% to account for the unexpected closure of JEM in Sep, which was beyond Courts’ control. Barring a longerthan-expected closing of the JEM store, the trough should be seen in 2QFY14 (3QCY13). Going forward, things should improve on (1) a loosening in credit policy to improve sales, particularly in Malaysia, (2) a short term boost in sales from iPhone 5S and (3) the maiden store opening by FY3/15 in Bekasi, Indonesia to boost sales. Maintain BUY at SGD1.06 (reduced from SGD1.15 on the lower FY14F forecast) pegged to 14x earnings.

Weaker consumer sentiment already expected. As we have already warned in our last note, Singapore has been impacted by higher household debt exceeding 75% of GDP. In Malaysia, the government’s pullback on fuel subsidies has affected Courts’ core customer base. Additionally, the Malaysian government’s warning on rising household debts and an aggressive push by AEON Credit to offer retail credit services had prompted Courts to tighten its credit policy which affected its sales, as seen in the negative like-for-like growth in Malaysia (see Fig 5).

Cutting forecast further on closure of JEM. Despite having cut our FY14F forecast in our previous note, we are reducing it further by 8% to account for the closure of the JEM shopping mall where Courts’ latest Singapore store is located. Despite opening only in Jun 2013, a collapse of a ceiling on 20 Sep 2013 forced the closure of the entire mall and all 241 shop units. Expected to be closed indefinitely until safety checks are conducted, we are factoring in a one-month closure for now.

Not all gloom and doom. Having said that, management during the NDR pointed to some positive forward catalysts. One, Courts intends to loosen its credit policy gradually in Malaysia in upcoming quarters, having admitted an overly cautious approach. It will roll out new promotions to target the same customers that AEON has targeted with competitive rates. This will cause a slight drop in spread but will benefit its top-line sales. At this time, allowance for impairment loss is at a 25-year low of 5.1% so it can afford to be more adventurous. Two, it will also roll out new credit promotions in Singapore to capture more foreign worker and employment pass holders. Lastly, Courts’ first store in Indonesia has started piling works and is expected to be completed by FY03/15. Berkasi is a commuter city for Jakarta and is Indonesia’s most populated suburb with 2.6m inhabitants.

Source: Maybank Kim Eng Research - 30 Sep 2013