-  We reaffirm our BUY recommendation on Parkson Holdings (PHB) with an unchanged fair value of RM3.85/share, pegged to a PE of 22x FY15F earnings – one standard deviation above its 5-year historical mean PE. Stripping out its net cash, PE stands at 11x.

-  Sri Lankan conglomerate, Softlogic Holdings PLC and Softlogic Retail (Private) Limited (Joint Offerors) have launched a takeover offer for Sri Lankan-based department store operator, Odel PLC, of which 67.6%-owned Parkson Retail Asia (PRA) owns a 47.5% stake or 129.1mil shares.

-  The Joint Offerors currently hold a 45.2% stake or 122.9mil shares at Odel which were purchased between Rs.21.80/share and Rs.22.00/share. This had triggered the Company Take-overs Code.

-  The Joint Offerors are required to make a Mandatory Offer to purchase the remaining 149.2mil shares of Odel or 54.8% stake at Rs.22.00/share (RM0.55/share). This is at a 4% discount to Odel’s last traded price of Rs.22.90/share yesterday. A detailed Mandatory Offer document will be sent to all shareholder within 35 days (by 16 October).

-  PRA’s value in Odel has doubled within a period of three years since the acquisition in July 2012. At the mandatory offer price of Rs.22.00/share, PRA’s stake in Odel is worth RM70.7mil. In 2012, PRA acquired 42% of Odel for RM34.9mil or Rs1.4bil.

-  We view that the impact on PHB is negligible given that Odel’s share of associate profits in PRA’s books is SGD0.88mil as at FY14, which constitute 2% of PRA’s profit before tax.

-  Therefore, we retain our earnings estimates and BUY conviction. PHB is at the inflexion point and is still at the early stages of an earnings recovery. Earnings recovery is expected given the margin uplift and low base comparison, which is underpinned by a proactive store rationalisation and improving merchandising mix.

-  At the current level, the stock is trading at 17x forward PE, on par with its 5-year historical mean trend.

Source: AmeSecurities