Parkson cautious on outlook amid lower sales

Parkson Holdings Bhd (July 10, RM1.41)

Maintain sell with a reduced target price (TP) of RM1.47: We met up with the management of Parkson recently. The management appears to be still cautious about the outlook as consumers are still adjusting to the structural shifts within the economy.

The management indicated that in other countries that had implemented the goods and services tax (GST), sales typically fall in the months thereafter. In the case of Malaysia, sales could remain weak for about six months, the management estimates, before shopping pattern normalises.

Retail Group Malaysia has revised down its forecast retail sales for 2015 from 4.9% to 4%. This is on the back of higher costs of doing business and living, and higher retail prices owing to a weak ringgit.

This is consistent with Parkson’s weak same store sales growth (SSSG) for the nine-month period of financial year 2015 (9MFY15) of -1.2%. Furthermore, with the pump price surged in two consecutive months, consumers are now expected to have less money to spend. Hence, private spending is estimated to further decline.

Planned new store launches in Malaysia are two to three per year, while in China, about four to five per year. In China, that is about a 40% reduction from the previous target of five to eight stores per year.

In Malaysia, the Maju Junction store is targeted to commence operations in December. The estimated capital expenditure for the store is between RM40 million and RM50 million, and will incorporate the “edutainment” concept.

The group is also planning a large store in Melaka, which could measure two milllion sq ft in total.

The development is consisted of two phases, with the first phase to be completed by 2017.

The management indicated that a new store typically takes about one to three years to break even.

To recap, Parkson Vietnam, a wholly-owned subsidiary of Parkson Retail Asia Ltd (PRA), entered into an agreement with Hoang Manh to dispose of approximately 30% of equity stake in Parkson Hanoi for a total consideration of US$5,000 (RM18,950).

After the completion of the exercise, Parkson Vietnam’s stake will be reduced from 75.4% to 45.4%, making Parkson Hanoi an associate, instead of a subsidiary of Parkson Vietnam.

To recap, Parkson Hanoi was established in Vietnam in 2008, with principal activities including retailing and operations of shopping centres. Parkson Hanoi has leased two retail premises in Hanoi: Parkson Viet Tower and Landmark 72. Parkson Hanoi has been a loss-making entity for the past few years, with losses before tax of approximately S$5 million for FY13 and S$7 million for FY14.

To date, the company recorded a loss before tax of S$7 million for 9MFY15. The move to reduce the company to associate from subsidiary formerly will see PRA’s share of losses from Hanoi reduced accordingly.

Parkson has been actively buying back its shares in the open market, which could provide some downside support for the stock price. To recap, the group has switched to share buy-back from cash dividends, mainly due to the latter being constrained by a lack of sufficient retained earnings.

Note that the last time the company paid its dividend in cash was back in 2013, for 18 sen per share.

On July 2, the group completed the distribution of three treasury shares for every 50 shares held. A total of 61.9 million treasury shares were distributed back to shareholders. Upon completion, the company would only hold approximately 1.3 million treasury shares.

All in all, the near-term earnings risk has not subsided in our view, due to the continued structural issues in China, the impact of the GST in Malaysia, and the store portfolio restructuring.

Changes to our assumptions include promotional and advertising expenses which have been revised upwards from 5% to 8% for FY15 to FY18, as we expect heavy promotional and advertising activities to counter sluggish sales, as well as lower SSSG assumptions for China (-6% from -5% previously) and Malaysia (-3% from -2% previously).

In aggregate, we trimmed FY15/FY16/FY17 earnings forecasts by -12.3%/-14.4%/-8.5% to RM147.4 million/RM128.1 million/RM174.8 million.

Subsequent to the earnings downgrade, we cut our sum-of-parts-based TP for the stock to RM1.47 from RM2.19 previously. We, however, do not see any near-term rerating catalyst that could drive the share price. We reiterate our “sell” recommendation on Parkson. — TA Securities, July 10