Courts Asia

[CityFarmer]

Base on limited experience with Courts Asia, I noticed that the sales service varies among staffs. I have been served by staff who is very friendly and knowledgeable on the product. I have also been served by very impatience one, and like to "suan" (a Hokkien word meaning to throw sarcasm at someone) on questions asked. It seems all staffs are highly motivated to promote installments. May be the company gives incentive for the scheme.

(sharing a experience of an infrequent patron of the company)

[GPD]

Let me share an experience with Courts Asia Singapore. I bought an appliance recently. I received a call for a survey, which is absolutely normal. What surprised me, was the caller requested a top rating of experience, before the survey was started. After I expressed unwillingness, the caller terminated the survey immediately. She said, the survey form would be sent via email, which I have never received.

What a survey! I reckon the survey result should be very favorable, by design.

That's very interesting! It will be good if others could share their experience as well.

Essentially, I find management to be a little lost on their initiatives. The small things which they have done such as offering mobile phones (with no value proposition except to attract poor credit) and partnership with an insurance (which destroy any shopping experience there is) seem to indicate so. Negligible on revenue contribution but huge on evaluating management's capability.

Months back when I walked past a Courts store, they had their insurance booth in it and immediately, I got surrounded by 3 to 4 agents. No surprise the booth is now empty.

It's becoming a numbers game for management as they are are trying every mean to inject "life" to their business.

I was at Courts today to get a refund for their price match guarantee. It was handled by a management trainee so most likely that's why the service was ok. But I saw from the cashier counter a note that if their service is worth 9 or 10 point fill in the feedback form otherwise please speak to the manager about it.

If you see it positively, you get a chance to speak to someone who has some authority to do something. If you see it negatively, you see the survey as bias.

Otherwise, you can also say it achieve both.

Also some of the promoters are from the dealer's but with Courts uniform.

Anyway, most of they good deal aren't the best but there are some that if you happened to be looking for can be quite good. Got a wireless mouse for $19 which comes which a $10 voucher so effectively only $9.

In term of performance, the Indonesia segment is rather worrying now. Last quarter it generated about $3mil for 1.5 months (opens ard mid-Oct I think). This quarter (full 3 months) it generated also about $3mil so effectively half of Q3. I hope when Courts choose to go into ID they are aware of their spending power and habit.

Sale per sqft for SG, MY and ID are SGD1,174, MYR332(=SGD122) and IDR353(=SGD0.036), respectively for Q3. The figure for IDR segment is so low that it is almost neligible. They didn't reveal the sale per sqft for Q4 but since it is the same level of rev for twice the period (3mth vs. 1.5mth), we can guesstimate the figures ourselves.

If the other 2-3 upcoming ID stores perform similarly to the existing one, I think ID segment is going to be a drag to Courts.

[snapsnap]

24 Nov, 2015: Stocks with Momentum - Courts Asia

In September, the retailer's subsidiary, Home Lifestyle, opened the first JYSK store, which introduced a new range of Scandinavian-inspired home and living products, in its Bukit Timah store. By December, Courts Asia said it will be launching Ace Hardware, a home improvement solutions brand from the US, as a store-in-store concept.

Courts Asia said that exclusive partnerships with JYSK and Ace Hardware are in line with its strategy offering a comprehensive suite of solutions for the home. On top of this, the retailer plans to expand both JYSK and Ace Hardware stores islandwide within the next five years......................

http://sdb.theedgemarkets.com/2015/SMR/S...x6xaxe.pdf

[karlmarx]

Anyone still following Courts Asia (CAL)? FY17 results recently released:

http://infopub.sgx.com/FileOpen/SGXNet%2...eID=459289

http://infopub.sgx.com/FileOpen/Courts%2...eID=459291

1) Revenue recognition is now more conservative with the adoption of FRS 115 accounting standard. The balance sheet is slapped with $45m of net deferred revenue as liabilities and another $28m of reduction in its receivables. Book value fell from $291m (before adoption) in FY16 to $218m (after adoption) in FY17. The re-stated book value of FY16 is $216m. There are two implications:

a. debt to equity ratio increases from 127% ($370m/$291m) in FY16 to 139% ($304m/$218m) in FY17. Debts were paid down to ensure the covenants were not breached when FRS 115 is adopted, but gearing still increased.

b. book value increased only 1% from FY16 to FY17. If dividends are included, the increase is about 3.5%. The returns are paltry, considering that a large amount of debt was used.

2) For a finance business such as banking or pawnbroking, high gearing is acceptable if credit checks are in place, or if the value of collateral is sufficient to offset the risk of customer default on payment; barring barring fraudulent credit checks and a crash in the price of the collateral. CAL does not collect collateral, but relies only on credit checks of the customer. This leave it with no recourse (apart from legal) to recover the amounts owed if customers stop paying.

a. From its results briefing slides, we can estimate the credit exposure as a result of FY17's sales for Singapore to be $88m (18.2% of Singapore's revenue $491m), while for Malaysia it is $160m (74.1% of Malaysia's revenue $224m). This put the Singapore-Malaysia exposure ratio at about 1:2. Looking at AR16, where total receivables in Singapore is $183m and Malaysia is $312m, the ratio is also not far from 1:2.

b. Despite the somewhat stable economic growth of Singapore (2%) and Malaysia (4%), impairment rose from $19m in FY16 to $26m in FY17. Which is a rise from 4% of trade receivables to 5.3% of trade receivables. Should the economic situation worsen and job losses mount, I believe the impairments will be much larger.

3) Apart from exposure to subprime credit, the exposure to the Malaysian Ringgit (as a result of its out-sized Malaysian business) has been a drag on the group's financial performance. Currency exchange differences has taken out $44m of its book value cumulatively over the years.

So there is a large exposure of CAL to Malaysia, in terms of its currency, as well as lending to subprime customers. Both of which is highly dependent on (global) economic growth. While exposure to Singapore is smaller, it is not insignificant (1/3 of $487m of total receivables). A mild recession could maybe double impairments, a severe recession could triple or more.

Given the risk and performance as highlighted, I am not sure if buying above book value ($0.425) is a good proposition.

[karlmarx]

CAL's 2Q18 results are not so good as profit sharnk to $1.5m due to lower gross profits but similar overheads. Mr Market has reacted accordingly last Friday.

http://infopub.sgx.com/FileOpen/CAL_SGXN...eID=477624

The biggest concern however, may be the changes to consumer credit legislation. In the comments section, it was written that, 'In addition, the Ministry of Domestic Trade, Co-operatives and Consumerism in Malaysia has gazetted the Consumer Protection (Credit Sale) Regulations 2017 on 19 October 2017 and it will come into operation on 1 January 2018. This will include capping interest rates at 15% per annum.'

It seems that such a ruling is targeted at companies such as CAL, as the following remarks from a local newspaper show:

Its Minister Datuk Seri Hamzah Zainudin told the Dewan Rakyat today that the ministry had amended the Consumer Protection Act 1999 and enacted the consumer protection (credit sales) regulations 2017 to address high interest rates in credit transactions.

"Based on several consultation sessions with the industry, we have found that current interest rates could go as high as 35 per cent per year.

"Through the amendment, credit service providers may no longer impose interest rates above 15 per cent per year.

"The decrease in interest rates is hoped to be able to help the people, especially those who are underprivileged, to buy household items for their family," he said in reply to a question from Datuk Hasbullah Osman (BN-Gerik).

https://www.nst.com.my/news/nation/2017/...-beginning

The problem is compounded with impending interest rate increases. With the expiry of its loans in early 2019, we can expect CAL to renew these loans at higher rates, thereby driving up CAL's borrowing costs.

Looking at this quarter's 'earned service charge income,' which is income from its in-house credit facility. Singapore's earned service charge income is 35% of its credit sales revenue ($6.1m out of $19.1m), while it is 44.5% ($13.8m out of $31.2m) for Malaysia. For customers in Singapore, this means a third of all payments for the item purchased goes towards servicing interest, and for customers in Malaysia, almost half of what they are paying amounts to interest. No wonder the Ministers are upset!

https://www.celcom.com.my/Web_Center_Sit...it_faq.pdf

CAL charges its customers in Malaysia 2.08% per month, or almost 25% per year. Reducing the interest from 25% to 15% will result in a 40% reduction in income from its in-house credit facility. In FY17, CAL's Malaysia stores brought in $62.8m of interests. A 40% reduction will mean $25m less earning, based on FY17's figures. This could mean that CAL may start seeing losses from 4Q18 onwards, as the new ruling will come into effect on 1 January 2018.

[karlmarx]

There are two problem that CAL has to deal with. The first is Court's Malaysia deteriorating performance. The second is the string of debts due in a year's time, in a rising interest rate environment.

1) While Malaysia's economy has been growing at about 5% over the past few years, Courts Malaysia's total sales and earned service charge income has been trending lower. Credit delinquency has also started to increase over the past few months. These numbers do not seem to make sense. Does this suggest that the fruits of growth are distributed in a highly uneven manner? Without an understanding of this situation, it will be risky to project Courts Malaysia's future. Explanations, anyone?


2) On January 2019, CAL is due to repay $55m borrowed from its asset securitization programme.

On February 2019, CAL is due to repay about RM453m which it borrowed at 6.3% from its syndicated senior loan facility. CAL is likely to renew this facility as they are unlikely able to repay this amount over the 3 year amortization period (if I understood the loan correctly).

On March 2019, CAL's $75m MTN will be due.

To refinance any of its loans, it will likely have to pay a much higher interest rate. The considerations include not only the interest rate environment -- Bank Negara is expected to raise interest rate this year -- but also deterioration in CAL's fundamentals. CAL currently has only about $75m of cash. So it seems inevitable for CAL to refinance, and be paying more for it.

At the same time, the interest rate which Courts Malaysia charges its credit customers is reduced from 25% to 15%, effective 1 January 2018. Higher cost and lower revenue; unless Courts Malaysia is able to generate more sales from the reduced credit charges. However, the latest quarterly -- released mid February -- does not make any observation of this.

http://infopub.sgx.com/FileOpen/CAL_SGXN...eID=488970

https://www.bloomberg.com/news/articles/...te-trigger

[holymage]

Karlmarx,

I came across this article recently. It reports the same as per your independent conclusion.

There could be several reasons for this. My best guess are,
1) Inflation is higher in Malaysia which results in higher cost of living (that is why rates are also higher in Malaysia)
2) Depreciation of Ringgit which makes imports more expensive (remember sgd:ringgit hit as high as 1:3.15 ?)
3) Government policies are bias towards selected industries (as usual)
4) Malaysia's labour market is getting "slacker" (Typically wage increases are executed to attract/retain talent. I also read from Riverstone's financial report that the Malaysia government is loosening foreign labour policy.)

To get a better picture, I would recommend you to cross-check with other listed Malaysian consumer companies catering to domestic market.


Quote from Article:

"My family of five couldn't get by with a single source of income," said the mother of three children, ranging in age from 5 to 11. "With 50 ringgit ($13) before the GST introduction, you could buy milk and diapers for the kids, but not anymore."

Najib is presiding over brisk economic growth and low unemployment as he heads to the polls. The economy expanded at its fastest pace in three years in the July-September quarter -- 6.2% on the year -- driven by private-sector investment and increased exports. This, coupled with bright growth prospects for 2018, gave the central bank the confidence to raise its policy interest rate by 25 basis points on Jan. 25, to 3.25%. It was the first hike in three and a half years.

Yet low-income earners like Rafisah are feeling the brunt of higher living costs brought on by the GST, as well as the depreciation of the ringgit since 2014. A November poll by the Merdeka Center For Opinion Research captured the mood: 72% of the respondents cited the economy as their main concern, eclipsing security and political issues.

"Our exports may be doing well, but the figures don't trickle down to the people on the street," Liew Chin Tong, a member of parliament with the opposition Democratic Action Party, said in an interview. He suggested that the combination of economic hardships and the 1MDB scandal have caused Najib's popularity to plunge from over 60% during the previous election in 2013 to less than 30%.

https://asia.nikkei.com/Features/Asia-In...h-Mahathir

[karlmarx]

Thank you holymage for the link. It was an interesting read, and I searched for more of such articles just to satisfy my curiosity.

What caught my eye was that 40% of Malaysian households earn not more than RM4,000 a month. From a recent article, a household in Malaysia requires about RM3,000 a month to get by. I believe these are the people who will find Courts Malaysia's credit facility attractive. An Rm1,000 tablet or computer will 'only cost' RM50 per month (over 3 years). But given the hand-to-mouth financial situation of these people, a weak economic environment (such as inflation, as mentioned) will likely result in delinquency climbing quickly. I don't have data on Courts Malaysia's credit customers so this is just my speculation.

http://www.todayonline.com/world/stretch...ysia-do-it

[holymage]

Took some time and glance through Courts Asia latest financial report.

Courts Asia's business strategy reminds me of CarMax (NYSE listed), both are operating a financing arm aside from the retailing core, and earning through interest spread. Therefore, I think they will definitely refinance as long as there is customer demand. It is essentially "free money" and encourages sales, at the risk of delinquency. Furthermore, the loans can act as a cheap way to hedge against local currency fluctuations.
Anyhow, it doesn't make sense to me to purchase on credit. Thinking off the top of my head, on my last visit to Courts, ignoring time value of money, the total price could be as high as 30-50%+ should one purchase with credit!

Interesting information in their presentation. Most Singaporeans do not purchase on credit. Majority of Malaysians purchase on credit. There is an increasing number of Indonesians purchasing on credit. Hmm... One may draw their own conclusions with regards to consumer habits.
The delinquency rate in Malaysia and Indonesia are much higher than Singapore and on an increasing trend. Indonesia is as high as 11.6% for allowances for impairment loss on trade receivables!

[karlmarx]

As anticipated, CAL may be seeing red for 4Q18. And may continue to do so for FY19 as well if the situation persists.

http://infopub.sgx.com/FileOpen/CAL_Prof...eID=499616

If CAL is going to struggle in a benign economic environment, you can imagine how bad the impairments will be during a recession.