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This article first appeared in The Edge Financial Daily on September 18, 2018

Parkson Holdings Bhd
(Sept 14, 40.5 sen)
Maintain neutral with a target price (TP) of 79 sen:
Parkson Holdings Bhd has announced that its wholly-owned subsidiary, Parkson Credit Holdings Sdn Bhd (PCHSB), had disposed of a 70% stake in Parkson Credit Sdn Bhd (PCSB), to its 54.97%-owned subsidiary Parkson Retail Group Ltd (PRGL) for RM49 million. Upon completion, PRGL will own a 70% stake in PCSB while the remainder 30% will be owned by PCHSB, which means an effective interest of 68.5% for Parkson Holdings. We think a reason for the divestment, though to a related party, is to reduce a direct loan burden on Parkson Holdings, as there is little justification from other standpoints as PCSB is currently profitable, thus it should be seen as having better growth prospects among its business segments. We look forward to seeking further clarification from management on the earnings impact and any potential interest savings arising from the disposal. We leave our estimates unchanged based on our current assessment.

 

We forecast profit for Parkson Holdings this year, as we expect the turnaround in China to gain momentum and should mitigate the high operating costs incurred by both newly opened stores and new business ventures. Maintain “neutral” call with a financial year 2019 (FY19) book valued-based TP of 79 sen. Though potential upsides appear attractive, operational challenges in the near term, especially in the Southeast Asian region, may keep price movements subdued.

PCSB’s main business operations involve the provision of Islamic and conventional hire purchase/credit sale schemes for consumer durables and motorcycles in Malaysia through authorised dealers. It provides customers the convenience of purchasing products via instalment payments. As a company providing hire purchase and credit sale services, borrowings are thereby needed to support its business nature.

Having said that, we see the reasoning to lie in easing the burden of borrowings at Parkson Holdings’ level, which could potentially result in interest savings. Otherwise, in terms of its earnings, we see minimal rationale behind the agreement, as PCSB was profitable in FY17 and FY18. Also, with respect to current market factors regarding the hire purchase/credit sale business, the segment should remain profitable in near to medium term.  Taking PCSB’s FY18 profit after tax and extraordinary items as our rough guidance, this exercise is expected to effectively reduce 10%-15% from our FY19 earnings estimates. The gain on disposal will however be recognised as a one-off to Parkson Holdings. — PublicInvest Research, Sept 14

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