SINGAPORE (Nov 13): DBS is downgrading its recommendation on Courts Asia to “hold” from “buy” previously with a lower target price of 36 cents on weaker outlook for earnings on a tougher credit environment in Malaysia.
On Oct 9, the group announced that its 2Q18 earnings were down 74% to $1.5 million, while revenue decreased 1.4% to $176.5 million.
This was mainly due to lower contribution from Malaysia, which decreased 19.7% in Singapore currency terms due to the lower sales of goods and earned service charge income.
See: Courts Asia sees 2Q earnings fall 74% to $1.5 mil on Malaysia sales, lower margins
From Jan 1, 2018, Malaysia will start the adoption of Consumer Protection (Credit Sale) Regulations 2017, which will enforce a maximum interest rate cap of 15% on credit sales.
In a Monday report, analyst Alfie Yeo says that this move will potentially reduce the group’s margins and sales growth in Malaysia.
Courts recognised a higher impartment at $6.8 million, compared to $5.2 million last year, largely led by Malaysia, while the 180 days or more delinquency rate reached 7.9% in Malaysia, up from 7% in the previous quarter.
“As profitability from Malaysia credit sales currently yield over 20%, we see lower gross margins ahead from lower profitability and reduction in credit sales as product prices become more competitive,” says Yeo.
Following the Consumer Protection regulations and tougher credit collection environment, the group will rationalise its stores in Malaysia as it seeks to tighten credit granting and mitigate receivables risks.
“We do not expect store expansion to be aggressive especially in Singapore as there is more scope for better store productivity and omni-channel strategy on the back of the online trend,” says Yeo.
However, Indonesia has already ramped up nine stores, which the analyst believes the group should strive to achieve operational efficiency before opening more stores, as the stores continue to be loss making.
“We do not see Indonesia breaking even soon as even without the central costs, store operations are collectively loss making,” adds Yeo.
As at 3.00pm, shares in Courts Asia are trading at 34 cents or 0.8 times FY18 book with a dividend yield of 3.6%.
