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Expanding Courts Asia Record Higher Revenue But Locks In Lower Profits
Tradeable, Tradeable Ideas | 20 June 2014
By: Lim Si Jie
Articles (169) Profile
  1. Courts Asia recorded revenue of $830.3 million for the full year; the highest revenue recorded in the past five years.
  2. Courts’ allowance for impairment of trade receivables increased by 10 percent in the latest FY.
  3. Too much leverage from debt and growing competition in the e-commerce market.

Higher Sales But Profit Lowers
Courts Asia Limited reported a 4.6 percent increase in revenue to $830.3 million for the full year ended March 31, 2014 (FY14). However, pretax profit slid 26 percent to $38.0 million as a result of lower other income and gains, and higher administrative and finance expenses as the Group expands its footprint and operations in the region.

Revenue in Malaysia rose 5.1 percent in FY14, contributing approximately 31.7 percent to Group sales. The Group’s effort in reaching out to its best credit customers as well as new customers continued to yield results, whilst new stores opened by the Group during the current financial year also contributed to the growth. This is evident from the 18.7 percent jump in revenue in Ringgit during 4Q14 compared to the last corresponding period (4Q13). The Group’s earned service charge income increased to $35.8 million on a year on year comparison.

Revenue from Singapore, which made up approximately 68.3 percent of the Group’s sales for FY13/14, was up by 4.4 percent on the back of higher sales of electrical and digital products for the year. For 4Q14, revenue grew 7.7 percent due to higher bulk sales of digital products, as well as contributions from two new stores at JEM and Westgate.

Credit Terms
One of the strategies that Courts Asia adopt to boost its sales is to allow its customers to pay using credit terms. Customers are able to make payments in installments over a period of time. However, total cash from operations has been decreasing over the past five years, even though operating income grew steadily over the past five years.

Courts Asia might need to keep a close watch on the credit quality of its customers or the company may need to take on even larger financial risks by borrowing more money to fund its daily operations.

Source: Courts Financial Statement

Furthermore, allowance for impairment of trade receivables as at 31 March 2014 was $20.08 million compared to $18.65 million in the previous financial year. As an investor, we want to look for a company that is able to convert operating income into cash flow for the company. This is something which Courts seems to be lacking in some ways.

Long Term Debt
Even though Courts has been growing its revenue steadily in the past five years, the inability to convert operating income into cash flow compels Courts to fund its expansion through debts.

Courts’ long term debt to equity is 102.69 percent, which is about more than three times the industry long term debt to equity ratio. The amount of debt which Courts is leveraging on does not appeal to me as a sound investment. It appears that the expansion is coming at a pace that is leveraging on too much debt.

Competition From E-Commerce
In addition, the rapidly growing expansion of e-commerce provides a strong direct competition to Courts’ brick and mortar store. Even though Courts is also growing its e-commerce platform, they are still behind its peers in terms of an e-commerce community and pricing as they still need to put aside a percentage of their profits as rental and staff expenses.

Although Courts is currently priced near its NAV per share, there is still a lack of conviction to take a long position on Courts.

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Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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