AmWatch - Parkson Holdings : At the inflexion point BUY, 27 Aug 2014

STOCK FOCUS OF THE DAY

Parkson Holdings : At the inflexion point               BUY

We upgrade Parkson Holdings (PHB) from SELL to BUY, and raise our fair value to RM3.85/share (from RM2.20/share previously), pegged to a PE of 22x FY15F earnings. We deemed this fair as earnings are recovering from the trough level and in line with peers’ PEs of 17x-22x. Stripping out its net cash, PE stands at 11x.

PHB has put in place a sound strategy to restore profitability across its operating markets under the direct stewardship of founder Tan Sri William Cheng. Such a move could be quickly executed because 88% of its gross floor area (GFA) are leased, which gives flexibility for the closure of less profitable stores and ramping up of younger stores. We raise earnings estimates by a significant 24%-39% for FY15F-FY17F given our expectations of improving SSSGs and margin uplift from a proactive store rationalisation/optimisation plan. New store turnarounds in China are gaining traction and this would continue to boost margin. 

Consensus rating on HK-listed Parkson Retail Group (PRG) – which accounts for 65% of PHB’s EBIT – has seen a nascent positive inflexion point, on the back of a significantly stronger performance. PRG 1H14’s operating profit fell 22% YoY but management expects a flat operating profit for the fiscal year, which implies a stronger 2H14. SSSG contraction appears to be abating. Management is expanding its brand portfolio and merchandising mix to boost traffic footfall. PRG recently secured the distributor rights for the Mango brand.   We forecast SSSG to be flat this year (FY14: -7%) and to recover to 2% in FY16F and 4% in FY17F, vs. the average of 10% during its high growth period.

Singapore-listed Parkson Retail Asia (PRA) will continue to emphasis on its high growth Indonesian market, where it continues to open three new stores per annum. The mild SSSG contraction in Malaysia (-0.1%) should turn around. As at end-9MFY14, PRG has RM600mil, PRA (RM426mil) and PHB (RM130mil). Cash pile would be boosted by the sale of KL Festival City Mall for RM349mil. The key valuation drivers for PHB are improvement in SSSG for China and the monetisation of retail assets, particularly from loss-making stores.

Others :

Hong Leong Bank : Staging a solid performance in FY14   BUY

IJM Corporation : Next growth phase     BUY

Eastern & Oriental : Stronger profit recognition from Avira in the coming quarters             BUY

IJM  Plantations : Affected by higher costs for new mature areas              HOLD

KPJ Healthcare :  Margins improvement                HOLD

Supermax Corporation :Underperforms at half-time       HOLD

Carlsberg Brewery : 1HFY14: Weathering the challenging environment well          HOLD

TSH Resources : Dragged by loss in jointly owned refinery in 2QFY14        SELL

IJM Land : Merging for success  ACCEPT OFFER

NEWS HIGHLIGHTS

Mah Sing Group : Considering options after discovering caveat in Seremban land deal

Berjaya Food : Berjaya Corp to place out block of shares in BFood

Malaysian Airline System : Staff frustrated by lack of assurances

Felda Global Ventures Holdings : Indonesia beckons