-  We reaffirm our SELL on Parkson Holdings Bhd (PHB), with an unchanged fair value of RM3.00/share (Under Review), based on a sum-of-parts valuation.

-  Parkson has acquired a 50% equity interest in watch retailer, Watatime Group, for a cash consideration of RM15mil with internally generated funds. Cash pile as at end-1QFY14 stood at RM3bil.

-  Parkson has a call option to acquire another 20% stake in Watatime for RM8.2mil, which is exercisable within one year, commencing immediately after the fifth anniversary of the Put and Call Option Agreement. The indicative call option fee is RM3.2 million.

-  Subject to Parkson exercising its call option, Watatime has a put option requiring the former to purchase the remaining 30% equity interest in Watatime for the price equal to the net tangible assets of Watatime, as at the end of the month preceding the exercise of the put option.

-  With a total of 13 Watatime retail outlets located in shopping malls throughout Malaysia, the acquisition bodes well for Parkson in widening its earnings base. However, we think that any earnings contribution would be minimal.

-  Given there is no financial disclosure on Watatime at this juncture, our FY14F-FY16F earnings forecast remains unchanged. Our fair value is under review, pending further details from management.

-  Our cautious view on Parkson remains as there no sign of strong recovery in its China operations (c.70% of FY13 earnings).

-  Share price is trading at a historical 5-year low, falling by 65% since Jan 2013, despite Parkson’s share buy-back activities. The weak performance in its share price, we believe, is due to the continuous weak results (1QFY14 earnings declined by 48% YoY with a negative same-storesales growth in China) and its recent reclassification as non-shariah compliant counter.

-  At the current level, the stock is trading at 21x PE for FY14F, above its historical 5-year mean of 14x. Valuation is unjustified given the uncertainty of China’s improving macroeconomics condition and lacklustre earnings growth.

Source: AmeSecurities