Parkson shares ‘getting cheaper’ but not that attractive yet

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WHEN Parkson Holdings Bhd’s share price dipped below RM3 in late December 2013, some investors thought it was a steal for a cash-rich retail group, which has established a strong presence in China and Malaysia as well as in Indonesia.

However, its share price plunged even lower to RM1.99 during the week ended March 20, from RM2.47 the week before. Parkson closed at RM2.22 last Thursday.

“Parkson shares have been getting cheaper and cheaper. They appear to be attractive, but we would wait for confirmation that the worst is over,” PhillipCapital chief investment officer Ang Kok Heng says when contacted.

He recalls that Parkson (fundamental: 1.8; valuation: 2.4) used to be the “darling of the market” as it was a proxy for the consumer boom in China. But intense competition later ate into its sales, he says.

“Investors are waiting for the company to make a turnaround. Otherwise, its same-store sales growth (SSSG) will continue to fall.”

In its heyday, Parkson was trading at above RM10. The share price has now more than halved compared with its five-year high of RM4.77 in July 2011.

The group issued a statement to the stock exchange, saying it “is not aware of any circumstance within the Parkson group that could have led to this selling pressure on its shares”.

The share prices of both its listed subsidiaries — Hong Kong-listed Parkson Retail Group Ltd and Singapore-listed Parkson Retail Asia Ltd — have also taken a beating.

Responding to queries from The Edge, a spokesman for the group blames the share price plunge on foreign managers who sold the stock to rejig their investment portfolios.

“The stock has recovered some lost ground as we believe certain investors understand and share our confidence in the company’s fundamentals and prospects of the business and the overall retail industry,” she says in an email reply.

She adds that the retail market in Malaysia is experiencing a slight softening due to “uncertainties in the economy and the weakening ringgit”.

“In China and Vietnam, the economy and retail scene are stabilising, and Indonesia is still robust.”

Parkson has attempted to address the tough operating environment with structural changes to its business model, but this has yet to bear fruit. Thus, investors are not quite convinced of the new strategy yet.

The group changed its strategy to owning shopping malls — as opposed to only operating traditional department stores — and venturing into online retail. It also diversified into the food and beverage industry, with several restaurant chains under its belt.

Bogged down by the continued weak consumer sentiment and fierce competition in the retail industry, Parkson has in recent years struggled to sustain its SSSG and earnings growth.

In the past three financial years ended June 30, the company reported declining core net profits — RM380.1 million in FY2012, RM238.2 million in FY2013 and RM140.8 million in FY2014. Its earnings per share shrank from 22.11 sen in FY2013 to 13.02 sen in FY2014.

TA Securities forecasts that Parkson will see a lower core net profit of RM128.6 million in FY2015.

The group’s net profit for the second quarter of FY2015 soared to RM110.6 million from RM25.6 million in the previous corresponding quarter, thanks largely to a

RM109 million gain from the disposal of KL Festival City mall. Excluding the divestment gain, its quarterly core net profit would have been sharply lower.

Earnings per share more than quadrupled to 10.24 sen from 2.38 sen. However, revenue only grew 3.5% year on year to RM981.7 million from RM948.1 million.

In the six months ended Dec 31, 2014, Parkson posted a net profit of RM130.8 million, compared with RM56.3 million in the previous corresponding period.

Analysts reckon that the group may not be an attractive option for investors to include in their portfolio in the near term.

“We would advise investors to adopt a wait-and-see strategy on Parkson as the market has not fully factored in the impact of the Goods and Services Tax. Also, consumer spending is still on the weak side,” a TA Securities analyst tells The Edge via email.

parkson-chart_24_1060Analysts say Parkson’s fundamentals are still intact, pointing to its cash pile of RM3.36 billion as at end-2014. Netting off its borrowings, the group is sitting on net cash of RM1.13 billion or RM1.12 per share.

According to AmResearch in a report dated Feb 27, the company will eventually capitalise on its continuous branding initiatives, expanding brand portfolio, improving merchandise mix and introduction of dining concepts in its stores over the medium term.

“However, in its key market (China), Parkson still faces a challenging operating environment, mainly due to the weak consumer sentiment and intense competition,” the report says.

Kenanga Research echoes the sentiment, saying that the group will take a longer time to reverse the declining trend in its SSSG.

“SSSG will continue to see negative growth in the next two quarters. It might take another 1½ years for Parkson to turn around,” an analyst opines.

AmResearch maintains its “buy” call on the stock, with a fair value of RM2.85, while Kenanga is keeping its “market perform” call, with a lower target price of RM2.26. TA Securities retains its “sell” call, with a target price of RM2.51.

This article first appeared in The Edge Malaysia Weekly, on March 30 - April 5, 2015.