Anyone still following Courts Asia (CAL)? FY17 results recently released:
http://infopub.sgx.com/FileOpen/SGXNet%2...eID=459289
http://infopub.sgx.com/FileOpen/Courts%2...eID=459291
1) Revenue recognition is now more conservative with the adoption of FRS 115 accounting standard. The balance sheet is slapped with $45m of net deferred revenue as liabilities and another $28m of reduction in its receivables. Book value fell from $291m (before adoption) in FY16 to $218m (after adoption) in FY17. The re-stated book value of FY16 is $216m. There are two implications:
a. debt to equity ratio increases from 127% ($370m/$291m) in FY16 to 139% ($304m/$218m) in FY17. Debts were paid down to ensure the covenants were not breached when FRS 115 is adopted, but gearing still increased.
b. book value increased only 1% from FY16 to FY17. If dividends are included, the increase is about 3.5%. The returns are paltry, considering that a large amount of debt was used.
2) For a finance business such as banking or pawnbroking, high gearing is acceptable if credit checks are in place, or if the value of collateral is sufficient to offset the risk of customer default on payment; barring barring fraudulent credit checks and a crash in the price of the collateral. CAL does not collect collateral, but relies only on credit checks of the customer. This leave it with no recourse (apart from legal) to recover the amounts owed if customers stop paying.
a. From its results briefing slides, we can estimate the credit exposure as a result of FY17's sales for Singapore to be $88m (18.2% of Singapore's revenue $491m), while for Malaysia it is $160m (74.1% of Malaysia's revenue $224m). This put the Singapore-Malaysia exposure ratio at about 1:2. Looking at AR16, where total receivables in Singapore is $183m and Malaysia is $312m, the ratio is also not far from 1:2.
b. Despite the somewhat stable economic growth of Singapore (2%) and Malaysia (4%), impairment rose from $19m in FY16 to $26m in FY17. Which is a rise from 4% of trade receivables to 5.3% of trade receivables. Should the economic situation worsen and job losses mount, I believe the impairments will be much larger.
3) Apart from exposure to subprime credit, the exposure to the Malaysian Ringgit (as a result of its out-sized Malaysian business) has been a drag on the group's financial performance. Currency exchange differences has taken out $44m of its book value cumulatively over the years.
So there is a large exposure of CAL to Malaysia, in terms of its currency, as well as lending to subprime customers. Both of which is highly dependent on (global) economic growth. While exposure to Singapore is smaller, it is not insignificant (1/3 of $487m of total receivables). A mild recession could maybe double impairments, a severe recession could triple or more.
Given the risk and performance as highlighted, I am not sure if buying above book value ($0.425) is a good proposition.