9M18 Core Net Loss (CNL) of RM17.1m narrowed compared to loss of RM153.1m in 9M17 compared to our/consensus RM35.8m/RM52.5m full-year net profit forecasts. Extrapolating 3Q18 core net profit, we consider the results as within our expectation. Besides, this set of 3Q18 results could be an indication of a solid turnaround. Maintain OP. Our TP is RM0.860 based on SoP.

9M18 within our expectation. 9M18 Core Net Loss (CNL) of RM17.1m narrowed compared to loss of RM153.1m in 9M17 compared to our/consensus RM35.8m/RM52.5m full-year net profit forecasts. Extrapolating 3Q18 profit, we consider the results as within our expectation. No dividend was declared in this quarter as expected.

A solid 3Q18 earnings turnaround. QoQ, 3Q18 revenue came in 0.3% lower. China and Malaysia registered positive same-store-sales (SSS) growth which more than offset weaker performances in Indonesia and Vietnam. SSS growth in China (+1.7% vs +3.2% in 2Q18) and Malaysia (+4.5% vs -1.7% in 2Q18) due to stronger Lunar New Year festive sales as well as higher Chinese tourist arrivals in Malaysia during this period more than offset lower sequential SSS growth in Vietnam (-9.8% vs -2.3% in 2Q18) and Indonesia (-0.6% vs - 2.1% vs in 2Q18) due to downsizing of a store in Jakarta, as well as the aftermath of volcano eruption in Bali. Excluding the effect of store downsizing and volcano eruption, Indonesia would have recorded SSSG of 2.4%. China registered 4th quarterly positive SSS growth and fifth consecutive quarterly operating profit due to closures of underperforming stores and rationalization measure, which reduced same store’s operating expenses. This brought 3Q18 core net profit to RM25.3 compared to RM0.1m 2Q18.

YoY, 9M18 revenue rose 2% due largely to China which more than offset lower SSS growth across the South-East Asia markets. China’s 9M18 SSS growth grew 2% vs. -3% in 9M17 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 South-East Asia, including Malaysia (-1.2% compared to 9M17 of -1.0%), Vietnam (-6.5% vs. - 13.4% in 9M17) due to intense competition, Indonesia (-5.9% vs. -5.8% in 9M17) was hit by the absence of festive spending following the shift in the Lebaran celebration. 53%-owned Parkson China recorded improved operating efficiencies, closures of underperforming stores and a renewed retail format to report an operating profit of RM87m compared to an operating loss of RM64m in 9M17. This brought 9M18 CNL narrowing to RM17.1m compared to CNL of RM153m in 9M17.

Outlook. The Group focuses on delivering its transformational strategies, which include: (i) enriching its retail format and expanding product and services offerings, (ii) optimising store effectiveness and efficiency, and (iii) enhancing cross platform experience for its customers. South-East Asia continues to remain challenging.

Maintain OUTPERFORM. Our TP is RM0.860 based on sum-of-parts. We like Parkson for the following; (i) its strategy of optimising its retail format, expanding its product and services offerings, which is paying off, (ii) it is minimising stores losses via optimising store effectiveness and efficiency, which are bearing fruits, and (iii) China improvement to gain further momentum.

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 - 1 Jun 2018