Courts Asia

[specuvestor]

What is today's Terry O'Connor doing differently from yesteryear's Terry O'Connor that is resulting in such dramatic improvements?

I have no proof that the financial statements were "dressed up" for the IPO, but it is certainly puzzling. In any case, investors should be aware that "reversion to the mean" is a powerful business trend.

As usual, YMMV.

As per my previous posts, IMHO the difference was Courts Singapore megastore in Tampines

Hi Cityfarmer

Please refer to my 4 months' old post #35 below. GM for Malaysia is higher but that is just one aspect. We have to take into account credit cost and sales psf. We also know that this is their 2nd venture into Indonesia.

In any case in the long run the market is a weighing machine. Many "voting" stocks have risen past 2 months, and Courts being an IPO stock is deemed as little technical resistance. So we'll see if this is another Challenger

IIRC when I met Courts a year ago, (which they subsequently aborted the listing), their main profit generator is actually Courts Megastore Tampines, which is 1/3 their sales and half their profit, or something like that. They also closed down a number of stores that were unprofitable. IIRC Singapore sales per square foot is like 10X of the neighbour. Trace back the history and not difficult to understand the turnaround. I haven't read the new prospectus, do correct me if I am wrong.

---

http://remisiers.org/cms_images/research...v4_ed1.pdf

KE did a pretty good initiation on Courts yesterday and i was surprise that net interest income accounts for 46% of their PBT and that interest rate charged is actually 11.6%-29%.

Previously, poor credit control seemed to have led them to disaster in 2008 according to the report. "The old poorly designed credit infrastructure. Inadequate credit controls a sharp jump in bad debts, especially in Malaysia, Thailand. This led to the eventual closure of operations."

this is probably a problem since "Courts’ target audience for credit facility is those who cannot afford credit card loans or meet the minimum requirement for credit card sign-ups."

Seemed like the way to analyse this company will be to treat it like a finance company, looking at deliquncy ratio and net interest margin. Might even have to do some scuttlebutt to test their credit control

In any case, this is definitely not a simple retail company like challenger

(not vested)

This is their business model. They are a finance company. Hence credit control and counterparty risk management is most important

I have to admit that Courts Asia has performed way better than I expected after the initial dip. They are a consumer credit company that sells consumer goods

Malaysia business is not very profitable. I guess it is a function of the credit write-offs. Indonesia could be interesting if they manage the credit process properly I guess.

[level13]

Those who are thinking of buying shares in Courts at the current px will do well to go the thought process of what has caused the px to go up by 32% over the past 6 months.

Over this time period, Courts has released a decent set of earnings report and announced that they are venturing into Indonesia market.

At the time when it IPOed, the company is valued at ard $400 mil. The fact that the PE firm is unloading Courts is already a red flag. Fast forward to present, the company is now valued at $530 mil.
Paying $130 mil for hope is excessive as nobody knows for sure how well the indo business will turn out.

[shanrui_91]

I believe the business model seemed to be to sell the consumer good at nearly 0 profit margin while depending on credit finance to earn the profit. Basically, the goods act as a loss leader that allows them to earn credit interest which they charge at 11-29% while recycling cash by paying min interest of 5.5% to bank.

Courts Singapore 2008:
http://info.sgx.com/listprosp.nsf/07aed3...0000f7667/$FILE/lores_45016.pdf

In 2007 and 2008, Courts recognise 9 m of impairment losses on sales of $300m. Sales declined sharply in 2008 in Thailand after the company tightened credit control which suggest that credit has been used to drive sales for thailand and not the other way round.

In 2010 and 2011, Courts recognise 20m and 10m impairment loss of receivables on sale of 570m and 650m respectively. In addition, they did not pay income tax for both years due to some credit related to trademark and other stuff.

In 2012, they have 18m impairment loss of receivables on sales of 720m, finance cost also increase from 10m to 14m and they paid 9m more tax than 2011. How did they get a higher profit in 2012 than 2011?

Revenue increases by $50m, but cogs increases only by $30m. Employee compensation, advertising, contingent rental and other expenses which acounts of 25% of total expenses remain the same. Cost of inventory increases only by $20m. These are the reason why Courts has been able to edge out better profit.




Basically, its gross profit margin has improved from 20% in 2008 to 32% in 2012. Reason for the margin expansion :

1)the company has controlled its credit better after disaster in 2007-2009 as delinquency rate falls from 16% in 2009 to 10% in 2012 for Malaysia, which leads to much lower percentage of impairment loss on receivable

2)Inventory cost as % of sale has dropped from 75% in 2008 to 65% in 2011 and 62% in 2012. Not sure what they have done to achieve such savings but their sales have indeed more than doubled in 5 years. On deeper dig, it could be because they enjoy higher gross margin in Malaysia due to higher service charge as I am using Courts Asia to compare with Courts Singapore in 2008. Comparing the sale mix, service charge only account for $39m of $346 million in revenue (11%) in 2008, but this has increased to $120m of $724m in revenue in 2012(16%). This is likely to be main reason for lower COGS

Thus, it really seemed like the much better profit is attributable to more credit provided at lower impairment loss of receivable. Then again, it seemed hard to determine whether the improvement of credit process has been the result of better economic condition and higher wealth as compared to better process control by Courts. Only when recession comes can we understand whose risk management is the best.

Didn't have time to look through the whole prospectus, but hope that I have got the more impt point out.

(not vested)

[mobo]

The thing I worried about Courts is their debtors are likely mostly low income families with little weighted risk management. Unlike financial institutions who can diversify risks across different credit worthiness of loans, Courts by nature of its business will slant heavily towards "subprime" lenders.

Together with mostly very doubtful collaterals, i.e. all the used household appliances and furnitures, it is doubtful how much value can be derived from these confiscated items in the event of a default.

The profits IMO are mostly accounting judgements depending on estimated provisions and writedowns. I am not confident at all that Courts can withstand even a mild recession lasting 2 years.

Looking at the past actions of the PE industry, I doubt such provisions are adequate, accurate or prudent. Somehow I have this feeling that the PE firm is standing by waiting for sh!t to happen before doing and LBO to delist the company at a fraction of its IPO value.

[felixleong]

courts above $1 liao
I feel a bubble lol

[CityFarmer]

Phillip Security report on Courts Asia, TP $1.14

http://remisiers.org/cms_images/research...130325.pdf

[a74henry]

What is the PE?

[CityFarmer]

CIMB report on the company, TP S$1.32, Rating OUTPERFORM.

http://remisiers.org/cms_images/research...13cimb.pdf

[felixleong]

good read, thanks
I'm quite surprised that they have twice the number of stores in msia but the revenue contribution from msia is really so little.
Singapore seems to be where the gold is it~

[CityFarmer]

good read, thanks
I'm quite surprised that they have twice the number of stores in msia but the revenue contribution from msia is really so little.
Singapore seems to be where the gold is it~

It is a norm for company has operations in M'sia and Singapore. It is always much more revenue/store in Singapore than M'sia, probably due to different retail customer behavior. It is also the key support for high rental since occupancy cost ratio remain almost the same

Another possible reason is companies accounts more revenue in Singapore. This will reduce taxes since corporate tax in Singapore is lower than M'sia.