Courts Asia

[CityFarmer]

bad deal to buy from a private equity, challenger makes more sense

IMO, a blanket rejection base on seller will miss a gem. It does not mean Courts is a gem thou

I do agree with you challenger make more sense

[specuvestor]

bad deal to buy from a private equity, challenger makes more sense

Assume required return of market is 10%, so if an asset book is $10 throws out $1 cashflow ie $1/$10= 10%, the asset is worth $10.

A PE takes $5 out and leverage it by $5 means book is now only $5 but asset still throws out $1 cashflow means $1/$5= 20% return so you would pay 2X book ie $10 for it.

In both cases above, an "investor" is indifferent to 10% return.

Hence this is how financial engineering works and why have to be careful buying from PE. Somebody is paying for the $5 that the PE took out before IPO. That's why value investing looks at unleverage ROIC.

[level13]

Frankly i am surprised that the retail tranch is 5.6X over-subscribed. Seems like the sentiment has recovered sufficiently for the punters to surface again.

When they delisted in Y2008, Courts was valued at ard $100 mil. Fast forward 4 years on, after some business re-structuring, the company is now valued above $400 mil. Impressive effort from the PE firm for 4 years work!!

Prior to this listing, from Y2010, Courts has paid its shareholders $92.5 mil in dividends.
What a joke! if they are really keen to develop the indon market, just retain $40 out of the $92.5 mil
and there will be no need to tap the equity market (which has the highest cost of capital).
This is a classic exit strategy from the PE firm. Their intention is plain for all to see.

[CityFarmer]

Frankly i am surprised that the retail tranch is 5.6X over-subscribed. Seems like the sentiment has recovered sufficiently for the punters to surface again.

When they delisted in Y2008, Courts was valued at ard $100 mil. Fast forward 4 years on, after some business re-structuring, the company is now valued above $400 mil. Impressive effort from the PE firm for 4 years work!!

Prior to this listing, from Y2010, Courts has paid its shareholders $92.5 mil in dividends.
What a joke! if they are really keen to develop the indon market, just retain $40 out of the $92.5 mil
and there will be no need to tap the equity market (which has the highest cost of capital).
This is a classic exit strategy from the PE firm. Their intention is plain for all to see.

In Y2008 (when it was delisted), Courts was having two years of consecutive losses i.e. -$17.4 million (2007) and -$19.5 million (2008)

In Y2012 (when it is re-listed), Courts is having $39 million profit (2012) and $32 million profit (2011)

Impressive effort from the PE firm for 4 years work indeed and should duly rewarded IMO

[specuvestor]

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.

[D123]

As I understand it, Courts (Singapore) Ltd only included the Singapore and Thailand businesses, the latter of which lasted only from 2003 to 2008, after which it was shut down due to the lack of profits.

The new listed vehicle, Courts Asia Ltd includes both the Singapore and Malaysia businesses so you cannot compare the pre-buyout and current entities like-for-like.

So what have the PE guys done?

(1) Amalgamated the Malaysian and Singaporean businesses
(2) Sold off the Bukit Timah property at the trough of the real estate market to Sim Lian, ridding the company of its significant and final property. Went lean basically.
(3) Extracted $100M in dividends from the company
(4) Slapped on an additional $70M in debt on a balance sheet with approx $200M in equity
(5) Securitized the company's receivables to extract even more cash

Seems like a pretty straightforward LBO play, nothing more, nothing less. Besides, Baring is a reputable player in the PE industry; they know what they are doing. Btw, post-IPO, they are still the biggest shareholder of the company, even buying out some of its partners in the control vehicle ARG.

Two things I think are worth some concern going forward:
(A) The company wrote in the prospectus that they do not intend to enter further asset securitization programs once the latest one expires, which I assume would be in about 1 or 2 years' time. When that happens, does that mean they would need more working capital? Going back to the early 2000s, asset receivables turnover was about 230 days or so, compared to the 180 or so now in the last 4 years. Furthermore, given the supposed growing popularity of its credit lines, especially in Malaysia, wouldn't they need even more working capital then before?
(B) If the owners were so confident of its Indonesian venture, why didn't they just fund it themselves? Especially since they are going the asset-light route, not much capital would be needed up-front.

I wonder what the cornerstone investors are seeing in a company that is highly leveraged, susceptible to both credit and economic cycles, and is trading at a not-so-bargain-in-my-humble-opinion P/E of 11. Hmmm...

[newyorkcityboy]

We would agree with many of the "negatives" outlined here.

But as we know, in investing, things are never clear cut. I happen to have insights on how one of the cornerstone investors is thinking with regards the "positives".

Essentially, it is a play that Courts Asia will be a beneficiary of South-east Asian rising consumption growth. There are not many bright growth sparks in this increasingly gloomy world!

Courts is the largest electrical, IT and furniture retailer in Singapore (9.8% market share) and second largest in Malaysia (7%). Thus, there is value assigned to the brand franchise where Courts is expected to capture its share of the market growth projected at 4.9% CAGR to S$6.2 bil in Singapore and 4.3% CAGR to RMM9.9 bil in Malaysia over the next five years.

Department store peers like Parkson Retail Asia (PRA) which HSBC used to price Courts Asia off is trading at 19x PER, 3.7x book. Likewise, others listed in the region such as Robinson, Aeon Bhd, PT Sumber Alfaria are trading between 18-24x PER. So, on this metric, Courts Asia (priced at 11x) is still at a discount to the low end of 18x PER range.

If the pricing of PRA served as a guide, HSBC may not have taken everything off the table; so there could still be upside at the IPO price. In that instance, the PRA shares were sold at S$0.94 and it opened 12% above on day one. It then trended further up to reach c. S$1.40 in the subsequent months; attaining the current 19x PER.

Hence, the grey market for Courts of c. S$0.90, at 13x PER may not be stiff on a comps basis. This implies at least 18% upside for the cornerstone investors at IPO.

In conclusion, not all value practitioners are identical in their approach towards determining fair value. So not all value investors would find Courts Asia cheap at 11x PER. Value investors who have a "growth bent" and consequently assign a value to the business franchise obviously differ and hence took the plunge to back this IPO.

[freedom]

There isn't much advantage in retail comparing Courts to Challenger.

Challenger has much lower receivables than Courts, which means, Challenger relies much less on credit sales. Challenger is expanding into Malaysia as well, only 4 stores so far, so a great growth potential there.

Courts, to me, is much more a micro-finance company than a retail company.

[CityFarmer]

...
Two things I think are worth some concern going forward:
(A) The company wrote in the prospectus that they do not intend to enter further asset securitization programs once the latest one expires, which I assume would be in about 1 or 2 years' time. When that happens, does that mean they would need more working capital? Going back to the early 2000s, asset receivables turnover was about 230 days or so, compared to the 180 or so now in the last 4 years. Furthermore, given the supposed growing popularity of its credit lines, especially in Malaysia, wouldn't they need even more working capital then before?
(B) If the owners were so confident of its Indonesian venture, why didn't they just fund it themselves? Especially since they are going the asset-light route, not much capital would be needed up-front.
...

I shares with your concern on the Indonesia's venture. I strongly believe on incremental approach. Before they try and survive in a smaller scale, they seem too confidence on their Indonesia's venture.

---

We would agree with many of the "negatives" outlined here.

But as we know, in investing, things are never clear cut. I happen to have insights on how one of the cornerstone investors is thinking with regards the "positives".

Essentially, it is a play that Courts Asia will be a beneficiary of South-east Asian rising consumption growth. There are not many bright growth sparks in this increasingly gloomy world!

Courts is the largest electrical, IT and furniture retailer in Singapore (9.8% market share) and second largest in Malaysia (7%). Thus, there is value assigned to the brand franchise where Courts is expected to capture its share of the market growth projected at 4.9% CAGR to S$6.2 bil in Singapore and 4.3% CAGR to RMM9.9 bil in Malaysia over the next five years.

Department store peers like Parkson Retail Asia (PRA) which HSBC used to price Courts Asia off is trading at 19x PER, 3.7x book. Likewise, others listed in the region such as Robinson, Aeon Bhd, PT Sumber Alfaria are trading between 18-24x PER. So, on this metric, Courts Asia (priced at 11x) is still at a discount to the low end of 18x PER range.

If the pricing of PRA served as a guide, HSBC may not have taken everything off the table; so there could still be upside at the IPO price. In that instance, the PRA shares were sold at S$0.94 and it opened 12% above on day one. It then trended further up to reach c. S$1.40 in the subsequent months; attaining the current 19x PER.

Hence, the grey market for Courts of c. S$0.90, at 13x PER may not be stiff on a comps basis. This implies at least 18% upside for the cornerstone investors at IPO.

In conclusion, not all value practitioners are identical in their approach towards determining fair value. So not all value investors would find Courts Asia cheap at 11x PER. Value investors who have a "growth bent" and consequently assign a value to the business franchise obviously differ and hence took the plunge to back this IPO.

Thanks for the "positive" input.

IMO, i am not so sure on benchmarking Courts with Parkson Retail Asia (PRA). PRA is departmental stores, while Courts is more specialized stores. Anyway, interesting input and worth taken a note.

[KopiKat]

...
Two things I think are worth some concern going forward:
(A) The company wrote in the prospectus that they do not intend to enter further asset securitization programs once the latest one expires, which I assume would be in about 1 or 2 years' time. When that happens, does that mean they would need more working capital? Going back to the early 2000s, asset receivables turnover was about 230 days or so, compared to the 180 or so now in the last 4 years. Furthermore, given the supposed growing popularity of its credit lines, especially in Malaysia, wouldn't they need even more working capital then before?
(B) If the owners were so confident of its Indonesian venture, why didn't they just fund it themselves? Especially since they are going the asset-light route, not much capital would be needed up-front.
...

I shares with your concern on the Indonesia's venture. I strongly believe on incremental approach. Before they try and survive in a smaller scale, they seem too confidence on their Indonesia's venture.

They need to have a compelling story to get everyone excited mah...
See Bloomberg extracts,

Indonesia’s growth is the fastest among Group of 20 nations after China, even as the faltering global recovery hurt its currency and damped expansion in neighbors from Taiwan to Singapore. Investments accounted for 32.9 percent of GDP last quarter, the highest share since the Asian financial crisis, underscoring President Susilo Bambang Yudhoyono’s success in boosting confidence more than a decade after the nation sought an International Monetary Fund bailout.

“Investment is being driven by strong business confidence and low interest rates,” said Gareth Leather, an economist at Capital Economics Ltd. in London. “Given the poor outlook for global demand and the likelihood that the crisis in the euro zone will worsen again soon, we expect interest rates in Indonesia to remain at their current record low level for the rest of this year and next.”


Oh ya, btw, see pg19 of IPO prospectus. They were in Indonesia mkt before but pulled out in '09. Perhaps this time it's a lot more conducive? Extracts,

Barring any unforeseen circumstances, we expect our first Indonesian store to have a retail area of up to 120,000 sq. ft. We previously had operations in Indonesia prior to the Restructuring Exercise and had closed down these operations as part of the Restructuring Exercise so that the business could focus on the growth in the core markets of Singapore and Malaysia which had already achieved critical mass and presented greater potential upside. While our Indonesia business was profitable for most of PTCI’s history, PTCI’s total revenue accounted for less than 5% of our Group’s total revenue prior to our decision to discontinue our operations in Indonesia in 2009.

---

We would agree with many of the "negatives" outlined here.

But as we know, in investing, things are never clear cut. I happen to have insights on how one of the cornerstone investors is thinking with regards the "positives".

Essentially, it is a play that Courts Asia will be a beneficiary of South-east Asian rising consumption growth. There are not many bright growth sparks in this increasingly gloomy world!

Courts is the largest electrical, IT and furniture retailer in Singapore (9.8% market share) and second largest in Malaysia (7%). Thus, there is value assigned to the brand franchise where Courts is expected to capture its share of the market growth projected at 4.9% CAGR to S$6.2 bil in Singapore and 4.3% CAGR to RMM9.9 bil in Malaysia over the next five years.

Department store peers like Parkson Retail Asia (PRA) which HSBC used to price Courts Asia off is trading at 19x PER, 3.7x book. Likewise, others listed in the region such as Robinson, Aeon Bhd, PT Sumber Alfaria are trading between 18-24x PER. So, on this metric, Courts Asia (priced at 11x) is still at a discount to the low end of 18x PER range.

If the pricing of PRA served as a guide, HSBC may not have taken everything off the table; so there could still be upside at the IPO price. In that instance, the PRA shares were sold at S$0.94 and it opened 12% above on day one. It then trended further up to reach c. S$1.40 in the subsequent months; attaining the current 19x PER.

Hence, the grey market for Courts of c. S$0.90, at 13x PER may not be stiff on a comps basis. This implies at least 18% upside for the cornerstone investors at IPO.

In conclusion, not all value practitioners are identical in their approach towards determining fair value. So not all value investors would find Courts Asia cheap at 11x PER. Value investors who have a "growth bent" and consequently assign a value to the business franchise obviously differ and hence took the plunge to back this IPO.

Thanks for the "positive" input.

IMO, i am not so sure on benchmarking Courts with Parkson Retail Asia (PRA). PRA is departmental stores, while Courts is more specialized stores. Anyway, interesting input and worth taken a note.

Ya, why benchmark with Retailers? Why not Challenger, Harvey Norman,..?