- 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 an attractive 7x.

- 67.6%-owned Parkson Retail Asia (PRA) reported a somewhat weak 1QFY15 core earnings of SGD$6.9mil. This accounts for 18% of consensus full-year estimates.

- Nevertheless, we are not concerned about this. We are keeping our EPS estimates unchanged given that:-

(1) 1Q is a seasonally a weak quarter. Historically, PRA’s 2Q and 3Q results are stronger, underpinned by festivities. Based on FY14 numbers, the combined 2Q and 3Q constitute 61% of earnings. To be sure, 1QFY15 revenue accounted for 22% of consensus estimates, despite being a weaker quarter.

(2) 1QFY15 results reflect gestation losses from new store openings, which led to a margin compression. EBITDA margin fell by 3.9ppts to 12.8% from 1QFY14’s 16.7%. This is due to above-average number of store openings – seven new stores were opened in FY14, with six opened from 2QFY14 onwards. EBITDA margin should demonstrate recovery in 2Q or 3Q as gestation losses ease.

- Admittedly, Malaysia’s SSSG for the quarter had contracted to -4.4% (vs. -0.1% in 1QFY15) due to the short-term weak consumer sentiment. Despite this, it was offset by the stronger performance in Indonesia, with SSSG of +5.7%. Indonesia remains as the group’s high growth retail market.

- Vietnam’s SSSG contraction of -5.5% was somewhat in line with expectations given that the swing factor lies in a potential closure of one store that is currently loss-making.

- More importantly, PHB had recently released a circular to seek approval for a fresh mandate to renew authority for share buyback, which should provide support to share price, we believe. The AGM will be held on 19 November. The downside risk to share price is limited given its proactive share capital management.

- Overall, we are unmoved by the share price weakness as fundamentals remain intact. Major earnings contribution from China had showed a significant smaller SSSG contraction. PHB’s results are due for release on 24 November.

- The stock is trading at 14x forward PE, below its 5-year historical mean trend of 17x.

Source: AmeSecurities