News

In an announcement to Bursa Malaysia, Parkson Holdings is undergoing an internal re-orgnisation via the proposed disposal of the entire 67.6% stake or 457.9m shares in Parkson Retail Asia Limited (PRA) to Oroleon (Hong Kong) Limited, a wholly-owned subsidiary of 53.1%-owned Parkson Retail Group Limited (Parkson China) for a cash consideration of SGD228.5m (equivalent RM641.4m) or SGD0.499/share.

The offer price of SGD0.499 per share is 6% and 56% higher than PRA’s last traded price of SGD0.47 and net asset value of SGD0.32per share as at 31 Mar 2015, respectively. PRA shares are listed and quoted on the Main Board of the Singapore Exchange Securities Trading Limited. Its subsidiaries have an extensive network of 67 stores (including one supermarket) spanning across cities in Malaysia, Vietnam, Indonesia and Myanmar.

The proposal is expected to be completed by the 4Q CY2015.

Comments

We are neutral on this latest corporate development by Parkson which came as a surprise to the market. The proposed divestment would enable Parkson to utilise the cash proceeds for business expansion, new investment opportunities and working capital but cause earnings dilution from lower effective stakes in PRA.

The proposed divestment works out to: (i) 11.9x PRA’s FY Mar 15 earnings which is below that of regional peers, including Intime Retail Group (12.8x) and Golden Eagle (13.5x), and (ii) 1.56x PRA’s FY Mar 15 book value of SGD0.32/share.

Upon completion of the proposal, Parkson’s effective equity interest in PRA will be diluted from 67.6% to 35.9% which will results in lower earnings contribution to the PHB Group going forward. For illustrative purposes, the dilution is expected to hit Parkson FY16E net profit by 15-20%.

The proposal is not expected to result in any gain or loss being recognised in the statement of profit or loss of the Parkson Group (no recognition due to internal reorganisation). 

However, the gain of RM108.7m or 10.0 sen/share will raise Parkson net asset per share from RM2.64 to RM2.74 as at 31 Mar 2015.

Outlook

Looking ahead over the next subsequent quarters, we expect Parkson to continue facing a tough operating environment on the back of 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 would take a longer-than-expected period of time for Parkson to reverse its SSSG declining trend given that these stores have reached maturity.

Forecast

No changes to our earnings forecast.

Rating & Valuation

We are downgrading our target price from RM1.72 to RM1.43 as we attach a higher discount of 35% to holding company (previously 20%) due to the tough operating environment in China. Maintain Market Perform rating.

Risks to Our Call

A stronger-than-expected economic recovery in China.