What is the news?

Courts’ reported 2Q14 earnings of S$7.2m, -55% lower yoy, but  1.6%  higher  q-q.  Singapore’s  (SG)  2Q14  sales  were 10.8%  higher  y-y  due  to  bulk  sales  of  lower  margin,  older model,  of  digital  products  in  preparation  of  new  launches. Malaysia’s sales were however affected by credit tightening measures, which lead to a -16% decline in like-for-like credit sales.  Sales  in  Malaysia  decreased  11.0%  (8.3%  in  local currency terms) due to single-digit growth in cash sales.

How do we view this?

While  the  change  in  sales  mix  led  to  lower  Gross  Profit margins, we continue to be positive on the SG  segment of the  business.  The  launch  of  new  products,  increase  in spending  ability,  population  growth  and  completion  of  new housing units are expected to continue to drive higher sales growth.  We are however concerned over the MY segment.

1)  Like-for-like  credit  sales  sharply  down  -16%  for  6M14. We had previously  forecasted for higher credit sales due to higher  demand  for  credit  facilities,  while  credit  cost  should remain  low  as  Courts  is  able  to  choose  its  borrowers .

2) New  megastore  in  MY  experiencing  a  slow  start,

3)  The Megastore is not in-line with Courts’ current branding in MY thus making it in a disadvantageous position, and 4) A high 8%-10%  of  MY  standalone  stores  on  their  watch-list, causing a drag on profitability.

Investment Actions

We  adjust  our  forecast  to  include  2Q14’s  results,  lowering FY14E  NPAT  by  23%.  Based  on  our  DCF  valuation,  we derive a TP  of S$0.71.  Based on our concerns over MY, we think  more  visibility  is  needed.  We  downgrade  Courts  to “Neutral” and remove it from our “Deep Value Play” list

Source: PhillipCapital Research - 14 Nov 2013