This article first appeared in The Edge Financial Daily on August 29, 2018

Parkson Holdings Bhd
(Aug 28, 43.5 sen)
Maintain outperform with a lower target price (TP) of 81 sen: Parkson Holdings Bhd’s core net loss (CNL) of RM17.9 million for financial year 2018 (FY18) ended June 30, 2018 narrowed, compared with a CNL of RM224 million in FY17, versus our/consensus RM35.8 million/RM30 million full-year net profit forecasts. We consider the result as below our expectations due to lower-than-expected sales from China and an unexpected store closure (Anshan Parkson, which was closed for 24 days in April due to a fire hazard).

On a quarter-on-quarter basis, Parkson’s revenue for fourth quarter of FY18 (4QFY18) came in 11% weaker due to lower same-store-sales growth (SSSG) across the board. SSSG growth in: i) China (-1.5% versus +1.7% in 3QFY18) was due to the closure of Anshan Parkson for 24 days in April due to a fire hazard (excluding the impact, SSSG would have been positive); ii) Malaysia (-2.4% versus +4.5% in 3QFY18) on the back of diversion of consumer spending to big-ticket items following the announcement on zero-rating of the goods and services tax, and the high-base effect of 4QFY17 SSSG due to the shifting of Hari Raya festive calendar; iii) Vietnam (-14.6% versus -9.8% in 3QFY18) due to the tough operating environment in Vietnam amid a crowded retail scene; and iv) Indonesia (+1.3% versus -0.6% in 3QFY18). This brought 4QFY18 core net loss to RM29.1 million compared to a core net profit of RM25.3 million in 3QFY18 due largely to lower revenue in China (-17%) and weaker performance in Southeast Asia.

On a year-on-year basis, FY18 revenue rose 0.5% due largely to China, which more than offset lower SSSG across the Southeast Asian markets. China’s FY18 SSSG grew 0.5% versus -3% in FY17 due to its transformational strategies undertaken, which are bearing fruits, including aligning with the evolving retail markets and closure of underperforming stores. SSSG rates were lower across Southeast Asia, including: i) Malaysia (-1.5% versus of 3% in FY17); ii) Vietnam (-8.3% versus -14% in FY17) due to intense competition; iii) Indonesia (-3.8% versus -1.5% in FY17) was hit by the absence of festive spending following the shift of the Lebaran celebration. In FY18, 53%-owned Parkson China recorded improved operating efficiency to report an operating profit of RM110.7 million compared to an operating loss of RM41.9 million in FY17. This resulted in FY18 CNL narrowing to RM17.1 million compared to CNL of RM224 million in FY17.

We like Parkson for the following reasons: i) its strategy of optimising its retail format, expanding its product and services offerings, which is paying off; ii) it is minimising store losses via optimising store effectiveness and efficiency, which are bearing fruits; and iii) China’s improvement to gain further momentum. However, Southeast Asia continues to remain challenging.

We cut our FY19/FY20 net profit estimates by 36%/37% by conservatively taking into account higher losses at underperforming stores. We maintain “outperform” and conservatively lower TP from 86 sen to 81 sen based on sum-of-parts as we lower TPs for both listed operating units. — Kenanga Research, Aug 28