The 14th Malaysian general election concluded with a surprising outcome as the opposition Pakatan Harapan alliance pulled off a decisive victory against Barisan Nasional, ending the latter’s 61-year rule of the country since independence. True to its pre-election promise, the new government subsequently announced on 16 May 2018 the abolishment of the 6 percent Goods and Services Tax (GST) with effect from 1 June 2018. This brought cheers among Malaysians who have long been burdened by the rising cost of living. Even neighboring Singaporeans are also tempted to open their wallets to shop across the causeway given the relatively cheaper price tag of goods now.
On that account, SI Research explores how this new change could bring about a shift in consumers’ sentiments and willingness to spend in Malaysia’s retail landscape, and hence leading to an improved performance of retailer Courts Asia (Courts).
Gaining A Foothold in Malaysia
Courts is one of the leading retailers of electrical, IT and furniture products with presence in Singapore, Malaysia and Indonesia, operating over 90 stores in multiple store formats spanning over 1.7 million square feet of retail space.
Apart from providing consumers with a comprehensive and convenient shopping experience with its megastore concept, Courts also offers unique in-house credit facilities by allowing its customers the flexibility of paying for their purchases through instalments. Not only does this business model enable Courts to tap into new customer segments, but it also allows the group to derive additional income streams to supplement its product sales. Last year, revenue contribution from credit sales constituted around 34.9 percent of overall sales while earned service charge income accounted for about 11.3 percent of Courts’ FY17 revenue.
Year 2017 marked Courts’ 30th anniversary of operation in Malaysia. Starting from a single outlet in Johor Bahru back in 1987, Courts has come a long way to become one of the largest retailers with 69 stores across the country. Today, operation in Malaysia has become a significant contributor to Courts’ performance contributing 30.3 percent and 25 percent to the group’s FY17 revenue and net profit respectively.
Source: Company Annual Reports
Following the lifting of GST and better economic performance post-election resulting in higher consumer confidence level, Malaysian consumers should be motivated to spend more. Although total retail sales has only risen by 2 percent in 2017, Retail Group Malaysia is expecting the figure to grow to 4.7 percent this year which will be more consistent with the country’s gross domestic product expansion of 5.9 percent. Having served the Malaysian consumer over the last three decades, Courts is looking forward to many more years of growth together with the country’s progress.
Courts has adopted the new Singapore Financial Reporting Standard 115 to its FY17 financial statements given that a significant portion of the group’s business revenue is attributable to services and credit bundle sales. Following the implementation, FY17 revenue dipped 1.5 percent from the restated FY16 revenue to $740.5 million mainly due to lower sales of goods on the back of a weaker retail environment offset by higher earned service charge income. However, net profit more than tripled to $23.7 million from the restated FY16 profit driven by higher margins and better cost management.
Latest 9M18 revenue declined further by 1.8 percent to $549.8 million. Unfortunately, administrative expenses jumped 3.9 percent arising from higher allowance for impairment of trade receivables. As a result, net profit sank 43.9 percent to $11.1 million.
Ahead of its final quarter results to be announced on 30 May 2018, Courts released a profit guidance on 18 April 2018 that the group expects earnings for 4Q18 to be significantly reduced with the possibility of reporting a net loss for the quarter, owing to the introduction of the Consumer Protection (Credit Sale) Regulations 2017 which came into effect on 1 January 2018. The new rule effectively capped the maximum interest rates on credit sales at 15 percent per annum, and has affected Courts’ revenue and profit negatively. Nevertheless, the group expects FY18 to remain profitable.
Attractive High Yield And Valuation
Listed on the Singapore Exchange in 2012 with an initial public offering price of $0.77 a share, Courts’ share price has since fallen to less than a third of its original value over the last few years to trade at a price of $0.215 as at 25 May 2018. The group has been distributing dividend payouts of $0.0129 for the last three years since FY15, and that worked out to a very attractive yield of 6 percent should it continue to maintain its current distribution. We think that the yield is likely to be sustainable given that the dividend cover – the ratio of profit attributable to equity holders over the dividends paid – in FY17 stood at a healthy 3.6 times.
Furthermore, Courts’ price-to-book ratio of 0.5 times also does not make the stock look expensive with the group’s net asset value at $0.445 a share as at 31 December 2017. Hence, we see Courts as a viable investment for investors who believe in the growth of the company riding on the recovery trend of Malaysia’s retail sector.