1QFY20 deemed within expectations. 1QFY20 CNL of RM45m expanded compared to CNL of RM43m in 1QFY19, and core profit of RM12.6m in 4QFY19, but is deemed within expectations of both our/consensus estimated core profit of RM8.5m each as its 1QFY is seasonally the weakest quarter. No dividend was declared, as expected.

YoY, 1QFY20 core losses expanded to RM45m compared to core losses of RM43m in 1QFY19 mainly due to lower sales (-4%), and higher finance costs (lease finance charges recognition under MFRS 16), but netted off by lower tax expenses. The lower sales came from negative overall SSSG growth from: (i) China (-5.0% vs. +2.9% in 1QFY19) due to lower direct sales arising from stores closures but marginal revenue growth was seen from strong sales in the Cosmetics & Accessories category (51% of merchandise sales) and the credit service income generated by Parkson Credit SB (acquired in October 2018), (ii) Malaysia (-1.0% vs. 1QFY19 of 5.9%) as last year sales benefited from the zero- rated tax holiday, and (ii) Indonesia (-8.0% vs. 1QFY19 of +0.3%) mainly due to the aftermath of earthquake occurrences and stores renovation. On the other hand, Vietnam’s SSS growth rates (-14% vs. 1QFY19 of - 16.5%) sunk deeper due to intense competition, especially with the launch of Vincom Center Landmark 81 Mall. Nevertheless, 53%-owned Parkson China recorded higher operating efficiencies to report an operating profit of RM56m (>100%) and Malaysia operation recorded operating profit of RM0.3m from operating loss of RM18m in 1QFY19, which more than offset other region’s losses to record EBIT of RM43.2m.

QoQ, 1QFY20 sunk into core losses of RM44.6m, compared to core profit of RM12.6m mainly due to lower sales (-7%) on seasonally lower quarter due to absence of festivities, and higher finance costs (lease finance charges recognition under MFRS 16), but netted off by lower tax expenses.

Outlook. Parkson’s strategy is on track includes: (i) optimising its retail format, expanding product and services offerings, which is paying off, (ii) minimising stores losses via optimising store effectiveness and efficiency, which are bearing fruits, and (iii) China operation’s improvement to gain further momentum. As of September 2019, the group’s department stores network comprises 42 stores in China and 61 stores in South-East Asia, including Malaysia (42 stores), Vietnam (4 stores), and Indonesia (15 stores). Note that, Parkson has ceased its Myanmar operation with the closure of its only store in 2QFY19.

PARKSON share price has risen an impressive 25% since our last upgrade to OP and we believe that much of the positives could have been priced in at this juncture. Downgrade to MP with unchanged TP of RM0.270 based on Sum-of-Parts (SoP) (implied PER of 34x based on FY20E EPS, above regional PER of 27x).

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

Source: Kenanga Research - 28 Nov 2019