Investment Moats

Thai ops to push Courts into the red in Q2

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I think i just found out why Courts share price fell for these few days.

COURTS Singapore has issued a profit warning saying that it expects to dip into the red for the three months to September, blaming an expected ‘substantial loss’ from its Thailand operations. ‘It is expected the group will suffer a loss in the second quarter as a result of a substantial drop in sales and the increased provision for credit sales debtors in Thailand due to the difficult operating environment there,’ the company said yesterday.In August, Courts reported a 31 per cent fall in net profit to $734,000 for its first quarter ended June 30, although sales grew 12 per cent to $85 million.

At the time, the company said that sales from Thailand fell 18 per cent on a like-for-like basis, after it put in place strict measures to lower credit risk ‘particularly in north-east region, in view of lower customer accounts quality’. Overall, its Thailand sales – which contributed 11 per cent of group turnover – still rose 23 per cent in the first quarter, boosted mainly by three new stores there.

The actual sales for Thailand for the second quarter to Sept 30 are expected to be ‘significantly lower’ when compared to the corresponding period last year, Courts said in yesterday’s statement. ‘This is due mainly to the tightened credit sanctions in Thailand,’ it added.

‘The company deems it appropriate to issue a profit warning. Thailand is expected to reflect a substantial loss which will in turn result in a loss for the group on a consolidated basis,’ it said. The financial results are expected to be published on Nov 8. According to data from Bloomberg, the company has been profitable for the past 11 quarters, except for the three months to March 31 this year.

The furniture and electronics retailer opened its first store in Thailand in 2003, and began an aggressive expansion drive in the country, opening more than half a dozen new stores there since then.

In Singapore, it has 11 stores and is also building its largest store to date – the 115,000 sq ft Courts Megastore in Tampines slated to open at the end of the year.

Credit sales are an important feature of its business. Consumers are attracted by the option of paying for purchases in monthly instalments at fixed interest rates.

Yesterday, managing director Terry O’Connor said: ‘We would like to highlight that the second-quarter results are due to the loss reflected in the Thai business. The Singapore business continues to maintain healthy sales records.’

Courts’ share price, which has risen 13 per cent since the start of the year, closed unchanged at 70 cents yesterday.

Courts unveils new retail ideas for megastore in Tampines

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SINGAPORE : Large format retail stores are the way forward, especially in a climate of rising rentals.

This is according to retailer Courts, at the sneak preview of its new megastore which is set to launch as early as mid-December.

Courts is investing a total of S$80 million into creating the store and it expects to breakeven by the second year.

Spend a certain sum of money on your furniture and furnishings, and you’ll get to use Courts’ in-house interior design and renovation services – this is just one of a slew of new retail ideas to be introduced when Courts opens its new megastore in Tampines later this year.

The retailer says the trend is towards entertainment, bulk-buying and one-stop, lifestyle shopping experience in bigger stores.

“You’ve seen the success of hypermarkets in recent years in Singapore. The success of big format locations, it’s something like IMM with free parking. People are showing signs that they prefer to see choice of range, more items under one roof and more solutions,” says Terry O’Connor, MD of Courts Singapore.

Courts Megastore is part of the first retail park built under Economic Development Board’s Warehouse Retail Scheme, where three retailers group their regional warehousing, administrative and retail operations to take advantage of lower rentals in industrial land zones and to achieve productivity gains.

The company says retail store rentals per square foot in the outskirts of neighbourhoods such as Tampines can cost less than half of those in a downtown mall, and that larger stores tend to be more cost efficient.

“Rents have been going up – that’s another argument for having large format, stand-alone retail. It gives you visibility on how rental is going to be. If you build a bigger business through large format retailing, the marketing costs generally are held within the Singapore environment. That’s because you’re not going to new towns. You’re still using the same media, the same newspapers, TV, etc. So your marketing costs become more efficient, probably by a factor of up to 20%,” says O’Connor.

Courts says it expects the megastore to breakeven by the second year.

It is aiming for 1-2 million visitors annually. And if successful, it says it plans to take such large format stores into regional markets like Thailand. – CNA /ls

Retailers: Am i late in the game?

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Maybe its the trip to vivo that inspire me to write this. Maybe its the forumers post on Challenger that got me thinking. I dunno its which but aside from FJ, Banquet i have actually study retailers in detail.

I pmed ghchua on some random opinions that i have on challenger (ghchua if you see this and are not comfortable, pls tell me, i will take it down. It looks quite general to me.):

Drizzt:

just went to vivo, saw the challenger stall there. do you think that stall will make a significant impact on revenue? i know margins are low, but i some how have this idea tat based on the number of stalls they have (not many), an increase of one that has a high catchment of visitors will have a bigger possibility of adding significant revenue to the bottomline. what do you think?

Ghchua:

I like Challenger and obviously I am a shareholder. I had even used my CPF OA funds to invest in it. Its dividend yield beats CPF OA interest rate hands down.

Yes, retail business is not really high margin, especially when you deal with stuff like computer retail where there are cheaper alternatives like Sim Lim. But do remember that Challenger offers more than Sim Lim. The customer service, the “all in one shop” concept etc. And they also provide after-sales service like computer repair, laptop repair etc. One can also sign up for internet access with one of the internet service provider in their store.

I think Challenger had been very careful not to open too many stores at one time. Which is why you can see them sustaining their high dividend payout since listing. I think they will do well with the new store, but not to the extent that it can give it a big profit growth. I see Challenger as a slow and steady counter, and with a nice dividend yield to reward one for holding its shares.

I am into this company for long term to reap its rewards.

Drizzt:

Like what bochap feels, there is something uncomfortable when you keep paying out more than your eps. im alright with that, as long as its within manageable means of your free cashflow. however courts seems to be paying more than that. how sustainable is that? (though they dun have much debt)

they have a similar model to food junction in terms of retailing. not expanding out of their means. but their product base is different from that of FJ. A downturn could hit them hard.

Ghchua:

Yes, Courts seem to be paying more dividends that what they can handle, simply because they went into Thailand. If they had waited for a while, I am sure they can sustain their dividends quite well.

The cash flow of Challenger had been good since listing. If you look at the annual report, their cash generated from operations had been positive. A downturn will hit the retail sector, and of course stocks will suffer. Even the most defensive one will also go down. That is the risk of investing in stocks right? You can’t have the cake and eat it.

Anyway, I don’t avoid stocks just because I think that the economy might suffer a downturn. As long as you believe in the long term, stocks in general will go up and company will make money, then you will do ok. The key is really, as I’ve said many times before, to have a diversified portfolio and prepare to invest more during a downturn.

That is the best way to invest in stocks I feel.

Drizzt:

thanks for the comments. it has been helpful. i think what you made abt thinking long term is valid but the question is when it comes to retailing do you think companies like popular, courts and challenger have long term potential? To be truthful i cant seem to examine that objectively.

Ghchua:

If you take Challenger out of the equation, the other two had been here for quite some time. They are focused on being here for the long run. Yes, these companies might not be able to give you double digit kind of growth year in year out. But as you can see, they are trying to do expand their business here and overseas. Popular had gone into the Greater China market, while Courts is also doing likewise in Thailand.

Retailers do have a part to play in S’pore’s economic growth. Retail business had been here for quite some time. I can’t see it going off in the near future. Each company do have a niche area, and it is up to them to execute it correctly in years to come.

If you ask me, I have more confident in these retailers rather than companies like Chartered, which is more prone to electronics cycle downturn.

I thank him for the valuable exchange. I still have my reservations about challenger going forward. I have not looked into Courts SP but it would seem that the risks for Challenger is greater due to their product range and the fact that their revenue depends on their mega stall and 2 super stall (which i believe one is about to close down). Being a guy who is surrounded by SLKs (sim lim kid), its hard to drill to them any value that you get from shopping at challenger. They lambast me that you will be a carrot head to buy anything from there.

Am i late into Challenger? i think not. it hasn’t got expensive before. fluctuating around this price range. we will se how this one goes.

Where to deploy next?

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Its tough calling yourself a yield investor when your core portfolio is made up of cash. that is the situation that i am in right now.

I could have missed the run up recently in REITs indirectly but i can’t do much about that as I am still recovering and would not like to take so much stress out of stock selection. Now that i can, I find my choices limited. Problem now is that when the year end bonuses do come, i might be sitting on really a fair bit of cash.
This morning i took alook at a report on Mobile one and its lacklusture performance. Compared to its peers (Starhub and Singtel), its story looks of one that is running out of ideas or direction. Underlying, it still manages its cashflow well. Yield is forecast to be around 6%. That is satisfactory by my standards. The problem is where will the growth of the company come from? It is currently hovering at 1.97. That looks good to me.

Macquarie Infrastructure did not correct as expected. It did not fly as well. At 9% yield it does look very attractive. Problem is how long will this last. I think i did my fair share of searching on how the revenue was formed and no point delving back again. However, one still needs to be cautious. Technically, it looks like it has failed to break the resistance of 97 cents. looks to be trending lower. Cmon now, show me where to get in.

Another stock that i have been watching for some time is Telechoice. This is part of a group of companies that i am very very well acquainted. Solid balance sheet, very bad margin(3-4%) its trading at 32.

Another one to watch is MMP REIT. At pleasant its yield is near 6%, but technically it looks toppish, failing to break and important resistance. With the underground walkway situation looming over them, i believe i can find a better price to enter.