FY18 Core Net Loss (CNL) of RM17.9m narrowed, compared to the loss of RM224m in FY17, and vs. our/consensus RM35.8m/RM30m full-year net profit forecasts. We consider the results below expectation due to lower-than-expected sales from China. However, we are positive on a steady earnings recovery ahead underpinned by the group’s transformational strategies. Maintain OP. Our TP is lowered slightly from RM0.860 to RM0.810 based on SoP.

FY18 Core Net Loss (CNL) of RM17.9m narrowed, compared to the loss of RM224m in FY17, and vs. our/consensus RM35.8m/RM30m full- year net profit forecasts. We consider the results below our expectation due to lower-than-expected sales from China and unexpected store closure (Anshan Parkson, which was closed for 24 days in Apr 2018 due to a fire hazard).

QoQ, 4Q18 revenue came in 11% weaker due to lower same-store- sales (SSS) growth across the board. SSS growth in: (i) China (-1.5% vs. +1.7% in 3Q18) was due to the closure of Anshan Parkson (Parkson China Top 5 stores) for 24 days in Apr 2018 due to a fire hazard (excluding the impact, SSS would have been positive); (ii) Malaysia (-2.4% vs. +4.5% in 3Q18) on the back of diversion of consumers’ spending to big-ticket items following the announcement on zero-rating of Goods and Services Tax, and the high base effect of 4Q17 SSSG due to the shifting of Hari Raya festive calendar; (iii) Vietnam (-14.6% vs. -9.8% in 3Q18) due to tough operating environment in Vietnam amidst a crowded retail scene; and (iv) Indonesia (+1.3% vs. -0.6% vs in 3Q18). This brought 4Q18 core net loss to RM29.1m compared to core net profit of RM25.3m in 3Q18 due largely to lower revenue in China (-17%) and weaker performance in South-East Asia.

YoY, FY18 revenue rose 0.5% due largely to China which more than offset lower SSS growth across the South-East Asia markets. China’s FY18 SSS growth grew 0.5% vs. -3% in FY17 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 (-1.5% vs. FY17 of 3%), Vietnam (-8,3% vs. -14% in FY17) due to intense competition, Indonesia (-3.8% vs. - 1.5% in FY17) was hit by the absence of festive spending following the shift in the Lebaran celebration. 53%-owned Parkson China recorded improved operating efficiencies to report an operating profit of RM110.7m compared to an operating loss of RM41.9m in FY17. This resulted in FY CNL narrowing to RM17.1m compared to CNL of RM224m in FY17.

Outlook. 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’s improvement to gain further momentum. However, South-East Asia continues to remain challenging.

We cut our FY19E/FY20E net profit by 36%/37% by conservatively taking into account higher losses at underperforming stores.

Maintain OUTPERFORM. We conservatively lowered our TP from RM0.860 to RM0.810 based on sum-of-parts as we lowered target prices for both listed operating units.

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

Source: Kenanga Research - 28 Aug 2018