Reported 1Q18 core LATAMI of RM43.5m (narrowing compared to loss of RM63m in 1Q17) compared to our/consensus RM48m/RM58m full-year net profit forecasts. We consider the results to be within our expectation in anticipation of better quarters ahead as its China operations gain recovery momentum with its third successive quarterly operating profit. Maintain OP. Our TP is RM0.880 based on SoP.

1Q18 results within expectations. It reported 1Q18 core LATAMI RM43.5m (narrowing compared to loss of RM63m in 1Q17) compared to our/consensus RM48m/RM58m full-year net profit forecasts. We consider the results to be within our expectation in anticipation of better quarters ahead as China recovery gains momentum with its third successive quarterly operating profit. No dividend was declared in this quarter as expected.

Result Highlights. QoQ, 1Q18 revenue fell 6% no thanks to lower same-store-sales (SSS) growth across the board post festive seasons, including Vietnam (-8% vs -14% in 4Q17); Malaysia (-7% vs +14% in 4Q17); Indonesia 1Q18 -14% vs +11% in 4Q17); and (ii) gestation period of new stores and new ventures. However, China registered positive SSS growth of +1.4% vs. 2.4% in 4Q17 and third consecutive quarterly operating profit due to closures of underperforming stores and rationalization measure that reduced same store’s operating expenses by 4.2%. Specifically, 53%-owned Parkson China’s (FYE Dec) 9M17 recorded a core net profit of RMB50.7m (RM30m), a major turnaround compared to a loss of RMB248.1m in 9M16. This brings Parkson Holdings Berhad core losses to RM44m compared to RM26m in 4Q17 due to lower overall negative SSSG and losses/gestation period from new stores.

YoY, 1Q18 revenue rose 4% mitigated by marked improvement in narrowing negative SSSG in China (+1.4% vs. -7.3% in 1Q17) due to its transformational strategies undertaken, which are bearing fruits, including aligning with the evolving retail markets and closures of underperforming stores. SSS growth rates were lower across in SouthEast Asia, including Malaysia (-7% vs -6.6% in 1Q17), Vietnam (-8% vs. -10.3% in 1Q17) and Indonesia (-14% vs. -13.1% in 1Q17). However, Parkson 1Q18 core losses narrowed to RM43.5m compared to the loss of RM62.6m in 1Q17 due to marked improvement in China underpinned by operating efficiencies and closures of underperforming stores.

Outlook. The Group focuses on delivering its transformational strategies closely aligning with the evolving retail markets, which include: (i) enriching its retail format and expanding its product and services offerings, (ii) optimising store effectiveness and efficiency, and (iii) enhancing cross platform experience for its customers. In SouthEast Asia, operating environments are anticipated to remain challenging due to the fragile consumer sentiment.

Maintain OUTPERFORM and target price at RM0.880. We like Parkson for the following; (i) its strategy of optimising its retail format and expanding its product and services offerings is paying off, (ii) it is minimising stores losses via optimising store effectiveness and efficiency, which are bearing fruits, and (iii) China operating profit is showing encouraging signs of improvement.

Key risks to our call are i) higher-than-expected losses in the SouthEast Asia region, and ii) slower-than-expected SSS growth.

Source: Kenanga Research - 23 Nov 2017