12M16 core LATAMI of RM105.6m after stripping out: (i) gains from disposal of a subsidiary amounting to RM92.2m (Parkson’s effective portion by virtue of its 67.6%-owned Parkson Retail Asia), and (ii) one-off impairment losses on goodwill, property and receivables amounting to RM76.1m. The results came in below our net loss forecast of RM23m and consensus RM54m full-year net profit forecasts. The negative variance was due to higher-than-expected losses in start-ups and lower same-stores-sales growth.

Key Result Highlights

QoQ, 4Q16 revenue fell 14% no thanks to largely negative same-storesales growth (SSSG) in China (-9.7% vs. -9% in 3Q16), Vietnam (-4.1% vs. -8.2% in 3Q16) and Myanmar (-25% vs. -7.6% in 3Q16). However, Malaysia (+21.5% vs. -17.4% in 3Q16) and Indonesia (+7.3% vs. +0.1% in 3Q16) registered positive SSSG growth arising from early festive buying due to shift in the Hari Raya/Lebaran calendar. The SSSG weakness in China (-9.7% vs. -9% in 3Q16) continued to be a drag to earnings. The Vietnam operations continued to be challenging amidst an increasingly crowded retail scene. The subdued economic growth and store closures coupled with losses at some stores in China, Myanmar and Vietnam, declining margins and weak consumer sentiment resulted in 4Q16 core net losses widening to RM34.6m (excluding one-off impairment losses on goodwill, property and receivables amounting to RM61.2m) compared to losses of RM25.5m in 3Q16.

YTD, 12M16 revenue rose 4%. However, Parkson recorded losses of (core PATAMI) RM105.6m after stripping out: (i) gains from disposal of a subsidiary amounting to RM92.2m (Parkson’s effective portion by virtue of its 67.6%-owned Parkson Retail Asia), and (ii) one-off impairment losses on goodwill, property and receivables amounting to RM76.1m. In China, the government’s austerity measures and keen competition from different retail formats resulted in negative SSSG of -9% compared to -6% in 12M15. The weak SSSG in Malaysia (-6.5% vs. -4.5% in 12M15) was impacted by weaker-than-expected consumer sentiment confidence. In Vietnam (-2.9% vs. -5.1% in 12M15), discretionary retail spending remained weak despite signs of economic stability. Only Indonesia (+4.7% vs +8.4% in 12M15) showed positive growth.

Outlook. There are plans to close FMI Centre (Myanmar), where the store is located, for re-development and the impending closure has affected sales. However, the landlord has not confirmed on the timing for the re-development. Looking ahead, we expect Parkson to continue facing a tough operating environment on the back of weak consumer sentiment due to the economic slowdown. Coupled with the intense competition from online shopping and oversupply of retail space, we believe it will take a longer period of time for Parkson to reverse its declining trend in SSSG.

We are downgrading our FY17E net profit by 8% to take into account higher start-up losses and lower same-stores-sales growth. By the same token, our target price is reduced from RM0.76 to RM0.70 as we impute lowered target prices for both its listed operating units (Hong Kong listed Parkson Retail Group Limited and Singapore listed Parkson Retail Asia Limited). Reiterate UNDERPERFORM.

Source: Kenanga Research - 25 Aug 2016