Period

4Q15/FY15

Actual vs. Expectations

FY15 core PATAMI of RM80.7m (-41.6% YoY) derived after stripping out: (i) gain from disposal of Festival City mall (RM108.9m, (ii) one-off provision due to arbitration in respect of tenancy agreement amounting to RM43.8m (Parkson’s effective portion by virtue of its 53.1%-owned Parkson China), and (iii) provision for contingent expenses and impairment of assets (estimate RM103m is Parkson’s Holdings portion) came in way below expectations by 20% and 33% of our and consensus full-year forecasts, respectively. The negative variance was due to higher-than-expected operating expenses.

Dividends

No dividend was declared in this quarter. Key Result

Highlights

QoQ, 4Q15 revenue fell 18% YoY to RM1,048m, dragged down largely by same-store-sales (SSS) growth from: (i) Malaysia (-17% vs +8% in 3Q15) which was also aggravated by the implementation of Goods & Services Tax (GST) on 1 April 2015 where consumers have front-loaded their purchases prior to the introduction of GST, and (ii) China which continued to register negative SSSG growth of 4% vs 3.4% in 3Q15). However, the Indonesian market contributed growth (+12% vs +7% in 3QFY15), but the Vietnam operations recorded decline in SSSG of 7.2% in 4Q15 compared to a 2.1% decline in 3Q14. Separately, the Myanmar operations recorded SSSG of 13.6% in 4Q15 (3Q15: 12.7%) driven by strong ramp-up in sales after the 1st year of operations in FMI Centre. Stripping out the provision for contingent expenses and impairment of assets (RM80m is Parkson’s Holdings portion), 4Q15 would have reported CORE LATAMI (loss) of RM10.9m compared to a profit of RM46m in 3Q15.

YTD, 1HFY15 revenue rose 5% to RM3.7b. However, core PATAMI fell 41.6% to RM80.7m after stripping out: (i) gain from disposal of Festival City mall (RM108.9m), (ii) one-off provision due to arbitration in respect of tenancy agreement amounting to RM43.8m (Parkson’s effective portion by virtue of its 53.1%-owned Parkson China), and (iii) provision for contingent expenses and impairment of assets (RM103m is Parkson’s Holdings portion). In China, the government’s austerity measures and keen competition from online retailers have affected discretionary spending resulting in negative SSS growth of 4.6%. EBIT declined by 40% due to the negative SSS growth and increased operating costs despite continuous improvement of margin from effort in allocating more space for complimentary service, which is bearing fruits albeit at a slow pace. The weak SSS growth in Malaysia (-4.5% FY15) was impacted by weaker-than-expected consumer confidence and following the implementation of the GST. In Vietnam (- 5% SSSG), discretionary retail spending remained weak despite signs of economic stability. Only Indonesia (+8% 12M15) shows positive growth.

Outlook

Looking ahead, 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 to 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 period of time for Parkson to reverse its declining trend in SSSG.

Change to Forecasts

We are downgrading our FY16E net profit by 20% to take into account the lower SSS growth in China and higher start-up losses.

Rating & Valuation

We are downgrading our target price from RM1.43 to RM1.17 as we impute the consensus’ latest target prices for both its listed operating units (Hong Kong listed Parkson Retail Group Limited and Singapore listed Parkson Retail Asia Limited). Maintain Market Perform rating.

Risks to Our Call

Upside risk: A stronger-than-expected economic recovery in China.

Source: Kenanga Research - 27 Aug 2015