- We reaffirm our BUY recommendation on Parkson Holdings (PHB) with a lower fair value of RM3.40/share (from RM3.85/share previously), pegged to a unchanged PE of 22x FY15F earnings – one standard deviation above its 5-year historical mean PE – following our earnings fine-tune.

- PHB’s 1QFY15 core earnings came in below expectations, accounting for 10%-12% ours and consensus full-year estimates due to the weaker-than-expected margins. We believe that the share price pullback had accounted for the weaker set of numbers.

- 1QFY15 results reflects an increased operating cost and gestation losses from new store openings – two new stores opened in China during the 1Q and Parkson Retail Asia (PRA) experienced an above-average number of store openings in FY14 (seven new stores), of which, six opened from 2QFY14 onwards.

- This led to a margin compression of 2.1ppts to 5.9% from 4QFY14’s 8%. We nonetheless expect stronger quarters ahead, underpinned by festivities, potential closure of loss-making stores, and turnaround of young stores.

- As such, we have fine-tuned our earnings estimates by ~14% on the back of lower margins. Despite our earnings fine-tune, we remain committed to our investment thesis that recovery is underway underpinned by its brand building phase and proactive store management. To be sure, 1QFY15 revenue showed improvement 2% YoY and 4% QoQ.

- More importantly, China’s SSSG contraction slowed significantly to the single mid-digit level, i.e. -4.5% in 1Q from 4QFY14’s -11.6%. Meanwhile, 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 caused by higher operating losses. However, the swing factor lies on the potential closure of one loss-making store. Myanmar saw strong sale with SSSG of 33%.

- On the positive note, the group had just renewed its share buyback policy. This would provide downside protection to its share price.

- Valuation wise, the stock is trading at forward PE of 16x. Stripping out its net cash, PE stands at an attractive 9x.

Source: AmeSecurities