Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on October 14, 2019 - October 20, 2019

PARKSON Holdings Bhd is confident that it can financially support its 67.96%-owned, Singapore-listed subsidiary Parkson Retail Asia Ltd (PRA) whose performance has been dragged down by its Indonesian and Vietnamese stores.

Recall that last Monday, PRA, which operates the group’s Southeast Asian stores in Malaysia, Vietnam and Indonesia, saw potential going concern issues being raised by its auditors.

PRA told the Singapore bourse that its auditors, Ernst & Young LLP Singapore, included an emphasis of matter (EOM) paragraph in its audit report for the group for the financial year ended June 30, 2019 (FY2019).

In the EOM, the auditors highlighted the existence of a material uncertainty that may cast significant doubt on the group’s ability to continue as a going concern. The auditors stated that PRA had incurred a net loss of S$34.61 million (RM105.35 million) in FY2019 and as at that date, the group’s current liabilities exceeded its current assets by S$61.34 million.

The report added that the ability of PRA to continue as a going concern was dependent on it generating sufficient cash flows from its operations and the continued financial support from the ultimate holding company, Parkson Holdings.

When contacted by The Edge, a Parkson Holdings spokesman says the group will be able to provide financial support to PRA.

“Parkson Holdings has deposits, cash and bank balances, and investment securities totalling RM2.8 billion as at June 30, 2019,” says the spokesman.

A quick look at the FY2019 balance sheet of Parkson Holdings shows that the group has total borrowings and debt securities of RM2.5 billion, of which RM189.27 million is short term.

PRA was also to blame for Parkson Holdings’ worsening financial performance in FY2019, in which its net loss widened to RM132.6 million from RM99.44 million a year ago. This was on the back of a marginal top-line improvement of 1.3% year on year to RM4.03 billion.

In Vietnam, Parkson stores recorded a negative same-store sales (SSS) growth of 19% while in Indonesia, its SSS saw a negative growth of 2%.

On a brighter note, its Malaysian stores delivered a positive SSS growth of 5%, which is commendable given the soft retail sentiment in the country. This was achieved through the optimisation of operational efficiency across its stores.

Parkson Holdings had 42 stores in Malaysia, four in Vietnam and 15 in Indonesia as at June 30. Its only store in Myanmar was closed last December.

In FY2019, its Malaysian operations achieved an operating profit of RM13.7 million while its operations in Vietnam and Myanmar recorded an operating loss of RM22.2 million and that in Indonesia saw a loss of RM22.11 million.

“PRA’s losses were mainly attributed to the losses incurred by the operations in Indonesia and Vietnam as well as the lifestyle retail concept business in Malaysia. The retail business landscape in Indonesia and Vietnam has been very competitive in the past few years, which exerted a lot of pressure on our performance,” says the spokesman.

“For our lifestyle retail concept business, although operating losses were lower in FY2019 than in FY2018, it has yet to be profitable and a longer gestation period may be required. As for our department store operations in Malaysia, there was an improvement in profit before tax by about 100% in FY2019 compared with FY2018.”

To address the problems at PRA, the spokesman says the group will continue to assess the viability of its stores and business units, and consolidate non-performing stores. “We will selectively open new stores at locations [with good potential]. At the same time, we will continue to enhance our product offerings and optimise operational efficiency across the stores.

“Cost-saving initiatives will continue to be part of our ongoing efforts to improve the group’s performance,” adds the spokesman.

On Dec 5 last year, PRA was placed on the SGX watch-list due to the minimum trading price (MTP) entry criterion. The MTP is a continuing listing requirement that took effect from March 2, 2015, for all SGX Mainboard issuers, whereby they must maintain a minimum share price of S$0.20.

PRA shares have been trading below the SGX’s minimum requirement since May 2016, closing at S$0.019 last Thursday.

Shortly after that, the company saw the departure of its CEO, Larry Michael Remsen, on Dec 21 last year.

Formerly the CEO of Indonesian retail group PT Matahari Department Store Tbk, Remsen, 71, has been PRA’s CEO since April 2017 and the reason given for his resignation was that he was relocating to the US due to family reasons. It is understood that Parkson Holdings executive chairman Tan Sri William Cheng has assumed the CEO post since then.

 

China the ‘saving grace’

What has been somewhat of a “saving grace” for Parkson Holdings are its stores in China, which are parked under Hong Kong-listed Parkson Retail Group Ltd (PRG). The 54.97%-owned subsidiary of Parkson Holdings is undoubtedly the group’s star performer, with 44 stores in 30 major cities across China.

In FY2019, PRG’s operations in China contributed an operating profit of RM155.29 million — 40% higher than last year, thanks to its continuous efforts in optimising store effectiveness — to Parkson Holdings.

“Our business model [for PRA] doesn’t differ much from PRG but China, where PRG operates, has the overall market size advantage and the different market tiers to manoeuvre its market share, although new malls are also mushrooming everywhere,” says the spokesman.

Cheng is understood to have also taken up the post of CEO of PRG, after Shaun Chong Sui Hiong, 51, resigned in February due to other commitments. Chong had been with the group for close to 25 years and had been PRG’s CEO since 2014.

Last Thursday, PRG shares closed at HK$0.62 — an 11% improvement year to date, and for a market capitalisation of HK$1.63 billion.

As for Parkson Holdings, its share price has declined 41% from a year ago, closing at 20.5 sen last Thursday. Nevertheless, Kenanga Research — the sole research firm covering the company — has upgraded its call on the counter to “outperform” from “underperform”, with a target price of 27 sen, indicating an upside of 32%.

“The share price has plunged 20% since our ‘underperform’ call and we believe most negatives have been priced in. We like Parkson Holdings for its strategy of optimising its retail format; expanding its product and service offerings, which is paying off; the minimisation of its store losses, which is bearing fruit; and further momentum from the improvement in its China operations,” says the research firm.

In its latest financial report, Parkson Holdings says the operating environment in Southeast Asia is anticipated to remain challenging amid severe competition. Investors will be closely watching whether the group can overcome the challenges via its cost containment efforts and turn things around at the ailing PRA.

 

 

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