Festive cheer from Courts Asia?
By Chan Chao Peh

Hardly a Saturday goes by without electrical appliances and furniture retailer Courts taking out multiple pages of advertisements trumpeting their wares. And in the year-end festive season when the propensity to spend is a tad higher, that exposure to attract shoppers seems to have gathered pace.

So, should  Courts Asia  be on your shopping list? Two comprehensive research notes, both issued the past week, have contrasting views. AmFraser, in an initiation note issued on Dec 3, calls the company a ?buy? with a target price of $0.82.

Just a day later, Maybank Kim Eng issued its own report with an opposite view, downgrading the stock to ?sell? and a target price of $0.60 ? down from $0.72 previously. On Dec 6, Friday, the company?s share price closed at $0.615, down 1.5 cents. Since the company was listed back in October 2012, the share price has lost 20%.

AmFraser?s Valerie Chan notes that Courts Asia has established a leading presence in Singapore and Malaysia, with 14 stores (covering more than 420,000 sq ft) in the former and 62 stores (some 940,000 sq ft) in the latter. Expansion in the pipeline includes a new store in Westgate Mall in Singapore for FY2014, and one each in Sabah and Kelantan. Starting next year, the company will be entering the Indonesian market with two stores. Chan notes that Courts has built up a strong brand equity and has firm ties with its suppliers, which gives the company pricing power.

Chan is also cheered by Courts? impending expansion into Indonesia, where strong consumer demand is coming from its growing middle class. She expects the first two stores in the largest Southeast Asian market to bring in an additional 4% revenue for FY15 and increase further to 5.9% in FY16. ?And we believe the Courts in-house credit facilities will allow its stores to stand out from the other players,? writes Chan, referring to a popular method used by Courts to encourage buying.

For the current financial year, Chan expects the company to turn earnings of $36.4 million on revenue of $876.4 million. For the subsequent FY15 and FY16, her estimate is for earnings to grow to $49.3 million and then $61.7 million, on revenue of $1.01 billion and $1.14 billion respectively.

Chan?s $0.82 value of Courts Asia is derived from the discounted cash flow method that translates into a  FY14F PER of  11.9 times. She notes that this is a significant discount to its retail discretionary peers which are trading at average PE multiple of 18x. ?We believe that the strong brand equity of Courts Asia warrants a higher PE multiple than the average of its direct peers in the electronics retail space.?

On the other hand, Maybank Kim Eng?s James Koh, who took over coverage of this stock from Alison Fok, is not so hot on the stock as he sees the company operating in a very competitive market. ?Courts Asia carries brands and products which are often similar to other retailers. Brand loyalty typically resides with the product brand owners rather than the retailers and price competition is intense as a result,? he states. Koh thus worries that Courts Asia would be able to pass on rising labour and rental costs to the consumers, and thereby, trimming the company?s already declining operating margins even further.

Just like AmFraser?s Chan, Koh notes that Courts? credit scheme has helped its earnings, and that the company has been careful in its risk management, as shown by 180-day delinquency rate at historical lows. ?Upside value here is already reflected in the lower provision allowances (4% of gross credit book). Thus, any deterioration in terms of higher impairments may reduce margins going forward,? he notes.

The impending 6% GST in Malaysia, effective April 2015 onwards, is also a cause of worry, albeit with the effects to be felt only in FY16. Koh is not optimistic that Courts would be able to fully pass on this tax, and that consumer sentiment on relatively big ticket items such as furniture and all the electrical appliances, would be affected somewhat. By means of comparison, when Singapore first introduced its 3% GST back in 1994, overall retail sales dropped 1.5% that year.

On Dec 5, DBS Vickers analysts Alfie Yeo and Andy Sim weigh in on the same stock. They say the 22% decline in share price since late October is due to overdone selling. Now is therefore a good buying opportunity. ?Earnings are likely to remain soft for the next two quarters, since we expect Courts? tight credit stance to continue in 2H14,? they state. ?However, we believe FY15F earnings should recover as we expect the company?s credit book to improve, leading the management to relax credit by the start of FY15F,? write Yeo and Sim, who have a target price of $0.77.

Courts Asia: Bearish Setup! (Short Sell)