Courts Asia Ltd Is Near A 52-Week Low: Is It A Bargain Opportunity?

Let’s have a quick test. What furniture company pops up in your mind if you have to deck your home out? Chances are, there would be some of you who are thinking of Courts Asia Ltd (SGX: RE2), the largest furniture, electrical, and IT products retailer in Singapore.

But despite its commanding market share in Singapore (the company’s most important geographical market), Courts Asia seems to have fallen out of favour in the stock market lately with its shares falling by nearly a third to S$0.385 over the past 12 months.

This has also happened in the broader backdrop of a sustained decline (see chart below) since the middle of 2013 when Courts Asia’s shares peaked above S$1.10 apiece.

Courts Asia price chart

Source: Yahoo Finance

At their current price, Courts Asia’s shares are in fact, hovering just above a 52-week low of S$0.38. What is actually happening to Courts Asia’s business and could there be a bargain opportunity for investors?

Poor financial health

A quick glimpse at Courts Asia’s financial performance over its past five fiscal years (see chart below; click for larger image) may be enough to tell us just why the company’s shares had embarked on the steady decline we had seen earlier.

Courts Asia's financials

Source: SGX Stock Facts

Total revenue at Courts Asia has grown by a total of 12.5% from S$674 million in the fiscal year ended 31 March 2011 (FY2011) to S$759 million in FY2015. But, there was a considerable 8.6% slump in revenue in FY2015 when compared to the level seen in FY2014.

In the meantime, Courts Asia’s profits have plunged rapidly over the past two years – falling a total of 58% from S$41.4 million in FY2013 to just S$17.4 million in FY2015 – while seeing the amount of debt on its balance sheet rocket.

To the latter point, we can see in the chart above how Courts Asia’s long-term debt has scaled up over time, in particular, spiking by 50% from S$218 million in FY2013 to S$328 million in FY2015. The progression of Courts Asia’s debt profile as well as revenues and profits could perhaps be an indication that the retailer hasn’t utilized its borrowings well to help fund growth.

Languishing sales and profits are usually a big driver in a stock’s decline. With the trends we’re seeing in Courts Asia’s financials at the moment, it may not be unreasonable for investors to fear that the firm may be heading toward more trouble. But, it’s also good to stress that the past is not a prefect indicator for the future and Courts Asia may still be able to turn the situation around and start growing again.

Ways for a possible comeback to happen

In its latest earnings announcement, Courts Asia’s management team had acknowledged that the retail environment is generally weak at the moment and that may cause consumer spending to be “fairly moderate” in all of the company’s markets (Courts Asia currently operates in Singapore, Malaysia, and Indonesia).

But, the company’s fighting back.

In April this year, Courts Asia announced that it had entered into a partnership with international retail brands Ace Hardware and JYSK, an international retail chain from Denmark. The partnerships involve Ace Hardware and JYSK’s products being sold exclusively in Courts Asia’s retail stores as well as the setup of shop-in-shop concepts.

Courts Asia had also expanded into Indonesia only in FY2015 and to date, three stores are already open with the fourth one expected to come by the end of the calendar-year 2015. The Indonesian stores have yet to achieve operational efficiency and once they do, they might be able to help pad up Courts Asia’s top- and bottom-lines.

Speaking of geographic expansion, Courts Asia also has the intention of breaking into a new geographical market with Mauritius being one likely candidate.

Meanwhile, the company had also launched new furniture lines and undertook cost-efficiency initiatives as well as other measures which are designed to help improve the bottom-line.

Foolish Summary

Given what we’ve seen, Courts Asia seems like a company that’s besieged by tough market conditions and fierce competition and these have chipped away at its margins amid escalating debt.

Within a shopping mall, Courts Asia sometimes has to compete head-on with many other retailers offering similar products such as IKEA (for furniture), Harvey Norman (for electrical, IT, and furniture products) and Challenger Technologies (SGX: 573) (for IT gadgets).

While Courts Asia have taken steps to reinvigorate growth – such as the introduction of new brands and an expansion of its geographical footprint – it remains to be seen how its growth-plans will pan out in the future.

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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 James Yeo doesn’t own shares in any companies mentioned.