In an announcement to Bursa Malaysia, 54.67%-owned Parkson Retail Group Limited (PRGL) is divesting the entire 100% stake in a wholly-owned subsidiary and the relevant shareholder’s loan for a combined total cash consideration of RM1.4bn (RMB2.32b). PRGL is expected to register a gain of RM549m (RMB0.9b) of which Parkson Holdings’ 54.67% effective stake will net a gain of RM300m or 28.0 sen/share. We are positive on this latest corporate development by Parkson, but it is not sufficient to raise our recommendation. Maintain UNDERPERFORM and TP of RM0.70.

Divestment of a subsidiary for a total consideration of RMB2.32b (RM1.4b) 54.67%-owned Parkson Retail Group Limited is divesting a wholly-owned subsidiary (Disposal Property) and the relevant Shareholder’s Loan for a combined total cash consideration of RM1.4bn (RMB2.32b). The sales and purchase agreements are divided into: (1) an equity consideration for RM1bn (RMB1.67b), and (2) subsequently selling the loan for RM396m (RMB649.7m). PRGL is expected to register a gain of RM549m (RMB0.9b) of which Parkson Holdings’ 54.67% effective stake is RM300m or 28.0 sen/share. For illustration purposes, Parkson Holdings Bhd’s book value per share is expected to rise by 13% from RM2.38 to RM2.68/share as at 30 June 2016.

The wholly-owned subsidiary owns a property located in the Chaoyang District of Beijing and comprises seven levels above ground for commercial use and three levels under ground, which are principally used as car parking spaces. The unaudited net book value of the Disposal Property was RM628m (RMB1.03b) as at 31 July 2016. We maintain our earnings forecast as this store registered a small profit of RM0.8m (RMB1.3m) in FY15.

Positive news but not enough to upgrade our recommendation. This latest corporate development by Parkson is positive and came in as a pleasant surprise to the market. More importantly, this latest move is seen as a positive step in its efforts to eradicate stores, which are loss-making and a drag to earnings. The Disposal also means the Group can cease to invest resources in a business operation which has been loss making and thus liberalising resources on other business operations of the Group. 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.

No change to our earnings forecast. Our target price is RM0.70. Reiterate UNDERPERFORM.

Source: Kenanga Research - 14 Sep 2016