SINGAPORE (Sept 19): Courts Asia just posted its highest quarterly earnings in three years, a jump of 56% against 1QFY16 to June, yet its shares continue to trade at 7.8 times FY17 earnings, below its historical 10.2 times, and even lower than its peer valuation of 22.9 times earnings.

CIMB equity research analyst Jonathan Seow views the group as a “turnaround story” but notes that the market “has yet to price in a recovery”.

Nonetheless, Seow has maintained his “buy” rating for the electronics and furniture retailer, with a higher target price of 53 cents, from 50 cents previously, adding that the retailer has been improving its productivity through the subleasing of floor space to complementary brands, and building a modular and flexible store format.

During the quarter, gross margins were 3.1 percentage points above its two-year historical average of 33%, due to higher merchandise margins from its bulk purchases and supplier rebates, an improved product range, and higher proportion of credit sales.

Seow also added that the group has been able to negotiate for lower rents for all its stores in Singapore and Malaysia, which would boost margins and future earnings.

Furthermore, even at current levels, the stock offers a dividend yield of 4% which is “attractive”. Yet, Seow reiterated that the risk of large credit losses remains.

Shares of Courts Asia are currently trading at 41.5 cents.