This article first appeared in The Edge Financial Daily on May 26, 2017

Parkson Holdings Bhd
(May 25, 61.5 sen)
Maintain sell rating with a target price (TP) of 51 sen: Parkson Holdings Bhd recorded a slight 0.4% year-on-year (y-o-y) drop in its nine months ended March 31, 2017 (9MFY17) revenue to RM2.9 billion, while revenue from the Malaysian and Indonesia operations increased 8.2% and 7.4% y-o-y respectively.

Stripping out exceptional items (mostly second quarter ended Dec 31, 2017 [2QFY17]’s impairment loss on intangible assets of RM308 million and a gain of RM802 million from the disposal of the entire equity interest in Beijing Huadesheng Property Management Co Ltd, a wholly-owned People’s Republic of China subsidiary of Parkson’s 54.67% owned subsidiary, Parkson Retail Group Ltd [PRGL]), Parkson recorded a 9MFY17 core net loss of RM273.8 million which was worse than the 9MFY16 core net loss of RM71.2 million.

This came largely below our and consensus expectations and is the seventh quarter loss for Parkson.

In 3QFY17, Malaysia, Vietnam, Myanmar, and Indonesia recorded earnings before interest and tax (Ebit) losses due to challenging environments such as weak consumer sentiment and an increasingly crowded retail scene.

For 9MFY17, the same store sales growth was negative across the board (China: -3%, Malaysia: -1%, Vietnam: -13.4%, Indonesia: -5.8%, Myanmar: -26.4%).

Nonetheless, China recorded an operating profit of RM20.6 million this quarter after three quarters of losses due to management’s cost control efforts.

The group has actively taken measures to revamp existing stores and upgrade existing brands such as the Korean-themed floors in Fahrenheit 88, Malaysia, and the opening of a Korean-themed outlet in China.

It is also developing an e-commerce platform for the Chinese market. However, we believe these measures will take some time to bear fruit and operations in the group’s key markets will remain challenging in the near term.

We estimate a net loss of RM222.8 million (from a profit of RM30.4 million) for FY17 and cut to FY18 to FY19 earnings by 18%-19%.

We maintain our “sell” call with an unchanged revised net asset value (RNAV)-based TP of 51 sen as we roll forward our valuation to 2018. Key upside risks include a sharp rebound in regional consumer discretionary spending and lower-than-expected operating costs. — Affin Hwang Investment Bank, May 25