Proposed divestment makes Parkson attractive, says analyst

KUALA LUMPUR (July 15): The proposed disposal of Parkson Holdings Bhd’s entire 67.6% stake in Parkson Retail Asia Ltd (PRA) will help the group to realise some cash that it can recycle for other purposes, says an analyst.

RHB-OSK analyst James Koh said this was a good move for Parkson and the transaction may allow some value to surface.

Parkson will part its 67.6% stake in PRA to another Hong Kong-listed subsidiary Parkson Retail Group Ltd (PRG) for S$228.5 million (RM641.42 million). The cash will be used for business expansion, new investments and working capital.

However, Koh noted that the business environment for Parkson is quite challenging, given that departmental store operations are mature in Malaysia and China, which forms the bulk of Parkson’s revenue.

He upgraded the stock to a buy call, with a target price of RM1.70.

On the market reaction today which saw the share dipped to a nine-year low of RM1.30, Koh said, “Like I was mentioning earlier, the business is quite challenging, hence not surprising that it has been on the downward trend.

“We had a sell call for the last 12-24 months, but are changing our recommendation to a buy, as this transaction may allow some value to surface,” Koh told in an email.

Year-to-date, Parkson’s share price had dropped about 40% from RM2.196 on Jan 2 to RM1.33 as at 12.20pm today. For comparison, year-to-date, the FBM KLCI declined 1.59%.    

Similarly, AmResearch’s Tan Ee Zhio reaffirmed a buy recommendation on Parkson with an unchanged value of RM2.65/share, pegged to 16 times price-earnings ratio (PER) on financial year 2016 (FY16) earnings.

“The stock is presently trading at an attractive 9 times FY16 PER, below its 5-year historical average PER of 19 times,” Tan said in a note today.

He noted the disposal of a cash consideration of SGD228 million (or RM641 million), representing a PER multiple of 12 times based on PRA’s 12-month earnings per share (EPS) ended March 31, 2015 of SGD0.042.

“The disposal price translates into SGD0.499/per share, which is at a 6.2% premium to PRA’s last traded price of SGD0.47,” Tan said.

Assuming that PRG funds the purchase consideration with internally-generated funds, Tan said that Parkson’s gearing is estimated to reduce to 0.6 times from FY14’s 0.7 times. As at end-9MFY15, Parkson is sitting on net cash of RM1 billion, he added.

AmResearch maintained its FY15-FY17 earnings estimate for now, pending further details from management. The disposal will result in lower earnings contributions to PHB moving forward, given its reduced stake in PRA, it added.

All in, Tan said that Parkson’s transformation into a lifestyle concept retail business and regional wide branding exercise, remains intact.

“This should help sustain sales/psf, while the persistent brand building phase (i.e. investing in exclusive brands and in-house labels) bodes well for margins,” he added.

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