This Retail Share Is Near Its 52-Week Low: Time for a Rebound?

Retailers in Singapore and Asia in general have not had much of an enjoyable experience in the past few quarters. After a great few years of growth following the rebound from the Global Financial Crisis of 2007-09, pan-Asian retailers have been hit by slowing growth in the region and higher operating expenses.

The main ‘star’ of this article, Courts Asia (SGX: RE2), has certainly not been spared from the industry’s slowdown either. Is this just a temporary downturn for the company or this is the new norm going forward?

Declining profit

Courts Asia’s share price has been steadily declining for more than a year now. From its peak of S$1.15 per share last May, shares of the company currently trade at S$0.56, just a fair bit higher than its 52-week low of S$0.52.

As one of the largest electronics and furniture retailers in Singapore, Courts Asia had been enjoying some good growth in its core markets of Singapore and Malaysia over the past few years with its profits almost tripling from S$15.2 million in the financial year ended March 2010 (FY2010) to S$41.4 million in FY2013.

However, the company has since faced higher operating costs and impairments of its trade receivables in FY2014, causing its profit to fall to S$28.3 million for the year.

A retailer and financier combined

The fact that the whole retail industry is facing a slowdown might be a temporary challenge as such businesses normally operate in a cyclical environment. However, the fact that the company had to impair its trade receivables shows that there might be some operational issues within.

Courts Asia is not just a traditional retailer that sells its products in its retail stores; it also provides credit facilities to its customers to help them finance their purchases. Sales made on credit are an important part of its business. For instance, credit-based sales makes up almost three quarters of its total revenue in Malaysia, which in turn accounts for roughly one-third of the company’s overall revenue.

If Courts Asia is unable to resolve its impairment issue and maintain a high level of control in providing credit facilities to customers with good credit, it might be a serious threat to the company’s long-term success.

Foolish Summary

At Courts Asia’s current price, it has a price to earnings and a price to book ratio of 11 and 1 respectively. Coupled with its dividend yield of 2.7%, those are low valuations which might give investors some comfort. However, in terms of its business, the company does carry some risk in the form of credit control of its customers (or lack thereof). Investors might want to take note of that in their evaluation of the possibility of a turnaround for the company.

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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 Stanley Lim doesn’t own shares in any companies mentioned.