News  In an announcement to Bursa Malaysia, Parkson Holdings Berhad (Parkson) is divesting wholly-owned Festival City Sdn Bhd (FCSB) via a conditional sale and purchase agreement (SPA) with Festiva Mall Sdn Bhd (Festiva Mall or the Purchaser) and AsiaMalls Sdn Bhd (AsiaMalls or the Purchaser’s Guarantor), the holding company of Festiva Mall, for a total cash consideration of RM349m. Note that Festival City Mall is an asset parked under the Holding company. AsiaMalls is a wholly‐owned subsidiary of Pramerica Asia Retail Limited, one of the largest private open‐end property funds in Asia.

 KL Festival City Mall is a 3-level shopping mall with a basement car park constructed on a piece of 99-year leasehold commercial land located along Jalan Genting Klang, Setapak, Kuala Lumpur with a remaining term of approximately 92 years. It has a total net lettable area of approximately 487,342 square feet with a current occupancy rate of c.99%. The divestment is expected to be completed by 2H14.

Comments  The sale is not a surprise because Parkson is embarking on the construction of premium shopping malls (with net lettable areas of approximately 1 million square feet), compared to KL Festival City Mall, which has a net lettable area of approximately 487,342 square feet that is deemed small.

 The financial impacts of the sale on Parkson are follows :

-     Parkson’s estimated exit PER works out to 29x based on KL Festival City Mall FY13 net profit of RM12m, o Parkson will recognise an exceptional gain of RM110m

or 10 sen/share which would increase its NTA by 8% from RM1.27 to RM1.37 as at 31 March 2014,

-     Neutral impact to our earnings forecast for Parkson as Festival City Mall only contributes 4% to FY14E net profit estimate, and

-     Proceeds from disposal is expected to be utilised for (i) investments including acquisition, development and management of retail malls (RM200m); and (ii) working capital and expenses related to the proposed disposal (RM149m).

Outlook  Looking ahead, we expect Parkson to continue facing a tough operating environment on the back of the weak consumer sentiment due to the economic slowdown, particularly in the China market, which contributes the crux of its earnings. Coupled with the intense competition from online shopping and oversupply of retail space, we believe it is difficult for Parkson to reverse its declining trend in SSSG given that its stores have reached maturity.

Forecast  We maintain our earnings forecast for now pending the release of Parkson’s 4Q14 results due out middle of next week.

Rating and Valuation Maintain UNDERPERFORM with a SOP target price of RM2.48. At the current market price, the stock offers a total return of -10.3%.

Risks to Our Call A stronger-than-expected economic recovery in China.

Source: Kenanga