Courts Asia

Financial Results for the Financial Year Ended 31 March 2018 ("FY17/18")

Highlights :
1. The Group reported revenue of S$713.1 million, a dip of 3.7% from S$740.5 million in the same corresponding period FY16/17
2. Group gross profit margins dipped marginally to 35.9% in FY17/18, from 36.3% in FY16/17
3. Remains profitable in FY17/18, notwithstanding a net loss position for Q4 FY17/18
4. The Group achieved profitability at S$8.1 million for FY17/18 compared to S$23.7 million for FY16/17
5. The Group’s cash position remains healthy, with strong net cash generated from its operating activities, increasing to S$108.6 million from S$98.7 million as at 31 March 2017
6. Net asset value per share was 44.7 cent as at 31 March 2018
7. No dividend is declared for the current financial period reported on vs 1.29 cent for preceding financial year.

More details in :
1. http://infopub.sgx.com/FileOpen/CAL_SGXN...eID=508014
2. http://infopub.sgx.com/FileOpen/CAL_Anal...eID=508016
3. http://infopub.sgx.com/FileOpen/CAL_Medi...eID=508015

Courts Asia today closed at S$0.220 (+0.005).

CAL is facing lower sales, higher financing costs, and greater credit risk.

1) Malaysian and Indonesian operations remaining unprofitable. The Indonesian operations look hopeless. The Malaysian operations need massive restructuring, unless the policy on interest rate limit is reversed. Refer to the segment results for better clarity:

http://infopub.sgx.com/FileOpen/CAL_SGXN...eID=508014

2) Adoption of FRS 109 (for FY ending 31 March 2019) and FRS 116 (for FY ending 31 March 2020). The implication for this is bad for the P&L and very bad for the balance sheet. Everything is clearly explained here:

http://infopub.sgx.com/FileOpen/Courts%2...eID=491939

3) The above 2 issues will lower CAL's credit quality. As all its loans are due for repricing early next year, the implication is that CAL will likely have to pay much more to borrow. And then interest rates are rising too. Currently CAL pays about $17m in interests a year. This may increase by anywhere between $2-6m, depending on the environment then.

To CAL's credit, it seems that they are starting to pay down their loans. But then this also means its financing business is no longer growing, as its trade receivables also show.

Barring a recovery in its sales and/or ASP, it seems likely that FY18 (and beyond) will be bad for CAL. By extension, there may not be any dividends as well.

Some may say that CAL has already had a credit event when it solicited and gained approval to relax its MTN covenants. The question for (prospective) investors is whether CAL will breach these relaxed covenants in the next year or so.

Surprisingly, Courts has offered to do an early redemption of its bonds

http://infopub.sgx.com/FileOpen/Courts%2...eID=512191

With the reduction in financing cost, it will be beneficial to the company's P&L.

Just 3 months ago, CAL sought permission from the note holders for the note covenants to be relaxed. Now, it has decided it no longer needed the money after all.

Since CAL's financing business depends on a readily available supply of cash, now that CAL is returning money to noteholders, it may mean that CAL has decided to gradually unwind the financing business in either Malaysia, Indonesia, or both. Why Malaysia and Indonesia? Because both these business units have poor performance/prospects; higher delinquency on its receivables, and in Malaysia's case, a cap on the interest it can charge.

CAL may have first decided to stay the course in Malaysia/Indonesia financing when it solicited noteholders approval for covenant relaxation in March. It may have just realised how challenging its Malaysian business is when it is unable to price its interest charges at a rate that is appropriate to the customer's credit profile.

Will CAL close its Indonesian operations, again? What will Courts Malaysia's marketing strategy be, without a financing arm?

After seeing some of Courts' competitors in Indonesia, I'm convinced that it is very unlikely that Courts will continue to operate in Indonesia. The biggest competitor being ACE Hardware.

ACE Hardware is a retailer with 144 stores in Indonesia selling everything that Courts does, and more. ACE's revenue grew from IDR 1.6 trillion in FY10 to IDR 5.9 trillion in FY17. Over the same period, net profit margin grew from 10% to 13%, and ACE's dividends grew from IDR 15 billion to IDR 281 billion. And it accomplished all of this with zero to negligible debt. ACE also does not offer financing to its customers.

Meanwhile, Courts Indonesia, whose stores are found in 3rd tier malls and/or outskirt locations, has been posting losses for several years. Its strategy to earn from low-income customers is not working, and its lack of scale means it cannot match the prices of large® retailers.

https://acehardware.co.id/en/laporan-tahunan

ACE is not the only competitor to Courts. There are many other retailers selling furniture and electronics. While Indonesia is not a developed economy, there are already dominant players in the retailing market with a strong customer base. If courts is looking to disrupt these bigger players, it has to do more than financing.

ACE Hardware is the dominant electronic retailer in Indonesia. When Indonesian wants to buy an electronic product, ACE Hardware will automatically come to their mind. Btw, they sell all sorts of tools too. Hence they are like Courts plus Self-Fix combined. Been to ACE Hardware numerous times personally as my wife is from Medan.

Thanks for confirming my observation.

I suppose prospective investors could look at ACE Hardware instead. But like the few fast-growing, unlevered, and high dividend-paying Indonesian stocks, ACE sells at extremely high valuations.

An 20.5 cents offer was made by Nojima for Courts, with the support of majority shareholder Barings Private Equity Asia (Singapore Retail Group).

https://www.businesstimes.com.sg/compani...205-apiece

Although the offers seems reasonable -- given the large debt that Courts presently holds, and its small/negative profitability -- it is unlikely that most OPMI will be taking up the offer, since most of them would be holding shares that are bought at prices much higher than 20 cents. This means that Nojima will unlikely be unable to reach 90% acceptance of the offer, and hence unable to privatise Courts.

The upshot for OPMI is that Nojima may be more willing to shed the no-sense Indonesian operations, and restructure the unsustainable Malaysian operations (of providing relatively cheap credit to consumers with poor credit scores). Courts Singapore remains a gem but if Nojima continues in Barings' footsteps of providing cheap credit to customers with poor credit scores, at a time of rising interest rates, the future Nojima-backed Courts may not even be worth 20 cents.

For Barings, it looks to be a no-loss deal. Barings privatised Courts in 2008 for about $100m. In 2012, it sold about 25% of Courts to IPO investors to raise $110m, which was subsequently used to finance its Malaysian and Indonesian expansion. Now that the money is all used up, and there are no results from the expansion to show for -- with share price languishing -- Barings is selling Courts which values the company at about $110m. As Barings own only about 75% of Courts presently, there might be some loss of capital from its purchase in 2008 and the present expected sale this year. However, the dividends it received since it privatised Courts in 2008 would have been substantial, and probably more than covered any losses. I didn't tally the total dividends that Barings received, but I would expect Courts to have generated a low to mid single digit annual return for Barings. On hindsight, Barings was correct on the timing of its purchase (in 2008) and share sale (in 2012), but wrong on its use of IPO money.

http://news.asiaone.com/News/The+Busines...74844.html
http://infopub.sgx.com/FileOpen/Courts%2...ileID=4983

For OPMIs, it is useful to note that IPOs may be vehicles for business owners to transfer risk, while making business moves that they would deem too risky with their own capital.

(19-01-2019, 10:26 AM)karlmarx Wrote: For Barings, it looks to be a no-loss deal. Barings privatised Courts in 2008 for about $100m. In 2012, it sold about 25% of Courts to IPO investors to raise $110m, which was subsequently used to finance its Malaysian and Indonesian expansion. Now that the money is all used up, and there are no results from the expansion to show for -- with share price languishing -- Barings is selling Courts which values the company at about $110m. As Barings own only about 75% of Courts presently, there might be some loss of capital from its purchase in 2008 and the present expected sale this year. However, the dividends it received since it privatised Courts in 2008 would have been substantial, and probably more than covered any losses. I didn't tally the total dividends that Barings received, but I would expect Courts to have generated a low to mid single digit annual return for Barings. On hindsight, Barings was correct on the timing of its purchase (in 2008) and share sale (in 2012), but wrong on its use of IPO money.

It sounds fishy that PE will lose money then in 2012 when we were still midway in recovery from GFC2008. Went back to look at the thread and this is what i found:

(1) During IPO in 2012, they sold some vendor sales and gotten back 86mil.
https://www.valuebuddies.com/thread-2409...l#pid34206

(2) VBs who went through the IPO prospectus documented that they extracted ~100mil dividends from delist to been listed.
https://www.valuebuddies.com/thread-2409...l#pid34468

(3) Since IPO, Courts gave out cummulative ~6.4cts of dividends and Barings owns ~382mil shares, dividends amount to ~24mil.

(4) For their 74% shareholding sales, they will net around ~0.74*110 = 81mil.

Net gain = 1+2+3+4 - cost = 86+100+24+81 - 100 = 191mil.
If they just used 20mil seed money, while leveraging the 80%, their %gain would have been = 191/20 = 900% = almost a 9x/10x bagger over 10years (100% gain per year)