Still in the Red

Parkson Holdings Berhad (PKS)’s 9M17 revenue dropped slightly by 0.4% to RM2.9bn and it recorded a net loss of RM23.1m. Excluding exceptional items, mostly the gain on disposal of a subsidiary in China of RM802m, 9M17 core earnings continued to deteriorate to a loss of RM273.8m, worse than 9M16’s core net loss of RM71.2m. Maintain SELL with unchanged TP of RM0.51.

9M17 Core Net Loss of RM273.8m

PKS recorded a slight 0.4% yoy drop in 9M17 revenue to RM2.9b as while revenue from the Malaysian and Indonesia operations increased by 8.2% and 7.4% yoy respectively, China and Vietnam & Myanmar registered respective declines of 1.9% and 9.2% yoy. Stripping out exceptional items (mostly 2Q17’s impairment loss on intangible assets of RM308m and a gain of RM802m from the disposal of the entire equity interest in Beijing Huadesheng Property Management Co., Ltd., a wholly-owned PRC subsidiary of PKS’s 54.67% owned subsidiary, Parkson Retail Group Limited (PRGL)), PKS recorded a 9M17 core net loss of RM273.8m which was worse than the 9M16 core net loss of RM71.2m. This came largely below our and consensus expectations and is the 7th quarter of losses for PKS.

EBIT Losses Across All Operations in 3Q17, Except China

In 3Q17, Malaysia, Vietnam, Myanmar, and Indonesia recorded EBIT losses due to challenging environments, such as weak consumer sentiment and an increasingly crowded retail scene. 9M17 SSSG was negative across the board (China: -3%, Malaysia: -1%, Vietnam: -13.4%, Indonesia: -5.8%, Myanmar: -26.4%). Nonetheless, China recorded an operating profit of RM20.6m this quarter after three quarters of losses due to management’s cost control efforts.

Maintain SELL With Unchanged RNAV-based TP of RM0.51

The Group has actively taken measures to revamp existing stores and upgrade existing brands such as the Korean-themed floors in Fahrenheit 88, Malaysia, and the opening of a Korean-themed outlet in China. They are also developing an e-commerce platform for the Chinese market. However, we believe these measures will take some time to bear fruit and operations in the group’s key markets will remain challenging in the near term. We estimate a net loss of RM222.8m (from a profit of RM30.4m) for FY17 and cut FY18-19E earnings by 18-19%. We maintain our SELL call with an unchanged RNAV-based TP of RM0.51 as we roll forward our valuation to CY18. Key upside risks include a sharp rebound in regional consumer discretionary spending and lower-than-expected operating costs.

Source: Affin Hwang Research - 25 May 2017