Parkson Holdings Bhd
(Oct 10, RM2.55)
Upgrade to “reduce” with target price (TP) of RM2.20: In view of the ever-evolving landscape in the retail business, Parkson Holdings Bhd (PHB) is shifting its dependence to shopping malls and retail businesses by acquiring several clothing and food and beverage brand owners. Additionally, in January 2014, PHB acquired a 50% stake in watch retailer Watatime Group Sdn Bhd. While this looks positive in the long term, we expect start-up losses to weigh on PHB’s earnings in the medium term.
In financial year 2014 (FY14), 52% equity-owned Parkson Retail Group (PRG) in China reported its lowest same-store-sales growth (SSSG) of -7%. While we believe PRG may see a marginal recovery in the medium term, we do not foresee significant improvements in the near term.
In view of expected continued weakness, we remain bearish on PHB stock in the medium term and maintain our earnings estimates. We upgrade the stock to “reduce” from “sell” on valuation, given 13% downside potential to our unchanged sum of the parts (SOTP)-based TP of RM2.20.
While we like PHB’s long-term strategies, we expect the operating environment for the group to remain challenging heading into FY15 in light of: i) the higher operating costs with rising rental, store and staff costs; ii) the slowing SSSG throughout the region; and iii) the long-term pressure on consumption in Malaysia as a result of the goods and services tax starting in April 2015.
Key risks to our view include a sharp rebound in consumer discretionary spending.
We maintain our cautious stance on PHB as it gradually attempts to revive its China operations via store rationalisation and improvements to product mix. Although we are more positive on PHB’s long-term outlook, we expect earnings pressure in the medium term. While we do not see any near-term catalysts, with 13% downside potential to our unchanged SOTP-based TP of RM2.20 we upgrade our rating to “reduce”. — AffinHwang Capital, Oct 10
This article first appeared in The Edge Financial Daily, on October 13, 2014.