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Courting Courts Asia

courtslogoCourts Asia Limited (SGX: RE2), Singapore’s largest electronics and furniture retailer, floated in October 2012 at $0.77 per share. Its shares are up 21.4% since then. During the same period, the Straits Times Index (SGX: ^STI) has risen 5.3%.

Courts Asia was formed through the combination of Courts Singapore and Courts Malaysia, which were once separately listed. Between 2007 and 2009, the two companies were taken private. The businesses of the two companies were then restructured and consolidated. The newly structured business was later listed in Singapore.

A look at Financial Year 2013 results

Courts Asia released its latest full-year results in May. It reported a rise in revenue of 9.6% to $793.8 million. Like-for-like sales were up by 8.2% as a result of broad promotional activities and enhanced product ranges, together with the Megastore re-launch in December 2012.

The re-launched online store in October 2012 saw triple-digit growth compared to last year. Sales were boosted by a full year operations of the Bukit Timah and Clementi stores that were opened in December 2011 and January 2012, respectively. Its earnings rose 5.1% to $41.4 million.

The gross profit margin and net profit margin stood at 31.5% and 5.2% respectively.

Courts Asia currently carries a total debt of $224 million on its balance sheet. Against a backdrop of $41.4 million, it gives a debt-to-net-profit ratio of 5.4, which seems a tad high. The debt-to-equity ratio stands at 1.27.

The cash conversion cycle stands at around 80 days. This measures the amount of time each dollar is tied up in the production and sales process before it is converted into cash through sales.

The ROE is at 14.3% and the cash flow from operations is negative at -$2.5 million. In the previous FY, it was $11.3 million. The business is valued at 12.6 times profit.

Future prospects

In Singapore, the Westgate store is set to open in the third quarter of 2014. In the medium to long term, the company is optimistic that population growth and an acceleration of completed housing units in Singapore, targeted to be 200,000 by 2016, will support retail sales.

In Malaysia, the group is experiencing positive momentum supported by the macroeconomic growth outlook. Courts Asia recently announced the site of its first “big-box” megastore – a two-storey Sri Damansara Megastore – which will occupy 108,000 square feet and is scheduled to open in August 2013.

Meanwhile in Indonesia, the first “big-box” store is expected to open in 2014 in Bekasi, Eastern Jakarta. Retail sector momentum in the country bodes well for the company to expand into this part of the region. Indonesia is seeing a consumer-led economic boom propelled by a growing middle-class.

Big-box stores have lower rental cost per square foot (psf) and this should make compensate for the lower shopping traffic and lower sales per square foot as compared to stores situated in shopping malls. A big box store can also earn rent from Food & Beverage operators located on the premises and also from independent brands that require shelf space.

Foolish Takeaway

Investors who want to get exposure to rising consumerism, the growing middle-class and urbanisation in South-East Asia could take a look at Courts Asia. In the next ten years or so, the population in this region will grow by more than 100 million. The median age in the ASEAN region is only 28 (as compared to 37 in the US). It is the youngest outside Africa.

However, investors should be wary of the high debt, high cash conversion cycle and negative cash flow, which may or may not change for the better after the expansions are completed.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.  Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.