Kenanga maintains 'underperform' call on Parkson, citing tough operating environment

by **Cals** Wed 20 Aug 2014, 22:22

Business & Markets 2014

Written by Gho Chee Yuan of theedgemalaysia.com

Wednesday, 20 August 2014 12:47

KUALA LUMPUR (Aug 20): Kenanga IB Research has maintained its "underperform" call on Parkson Holdings Bhd with an unchanged target price of RM2.48, saying the retail giant will continue to face a tough operating environment.

This, it said, is due to the weak consumer sentiment brought about by the economic slowdown, particularly in the China market which contributes the bulk of Parkson’s earnings.

"Coupled with the intense competition from online shopping and oversupply of retail space, we believe it is difficult for Parkson to reverse its declining trend in same-store sales growth (SSSG) given that its stores have reached maturity," Kenanga said in a note to clients.

"As such, we uphold our underperform rating with a sum-of-parts (SOP) target price of
RM2.48. At the current market price, the stock offers a total return of -10.3%," it said.

The research house is also maintaining its earnings forecast on Parkson for now pending the
release of the group’s 4Q14 results due for release in the middle of next week.

It has projected a core net profit of RM218.2million, compared to RM240.4 million in FY2013.

Commenting on Parkson’s announcement yesterday that it is selling KL Festival City Mall for RM349 million in cash, Kenanga said the deal was not a surprise.

Parkson is embarking on the construction of premium shopping malls with net lettable areas of about 1million sq ft," it said, while KL Festival City Mall has a net lettable area of about 487,342 sq ft which is deemed small in comparison.

The research house said the estimated exit price-to-earnings ratio (PER) works out to 29 times based on KL Festival City Mall FY13 net profit of RM12million.

"In addition, Parkson will recognise an exceptional gain of RM110million or 10 sen per share which would increase its net tangible asset (NTA) by 8% from RM1.27 to RM1.37 as at March 31, 2014.

"However, the disposal is expected to have neutral impact to our earnings forecast for Parkson as Festival City Mall only contributes 4% to FY14E net profit estimate."

Kenanga noted that the proceeds of the disposal is expected to be utilised for investments including acquisition, development and management of retail malls (RM200million) and working capital and expenses related to the proposed disposal (RM149million).

Parkson, in its announcement, said it is KL Festival City Mall as it intends to concentrate on developing larger malls to drive the department store group’s expansion plans.

It said the group and its wholly-owned subsidiary, Festival City Sdn Bhd, had signed a conditional sale and purchase agreement with Festival Mall Sdn Bhd and AsiaMalls Sdn Bhd for the disposal of the mall.

The divestment is expected to be completed by 2H14.