1HFY20 core losses expanded to RM138.5m compared to core losses of RM48.9m in 1HFY19, largely below both our and consensus estimated core profit of RM8.5m each due to higher-than-expected impact of MFRS 16 and lower same store sales across all markets. We revised our FY20E-21E earnings to core losses of RM380.9m-RM270.9m from core profits of RM8.5m-RM9.9m to reflect the higher-thanexpected net impact of MFRS 16 as well as the severity of Covid-19 outbreak impact on its main China operation. As we are ceasing active coverage, the stock is now a NOT RATED with our last SoP-derived TP of RM0.145 (from RM0.220).

1HFY20 sunk deeper. 1HFY20 core losses expanded to RM138.5m compared to core losses of RM48.9m in 1HFY19, largely below both our and consensus estimated core profit of RM8.5m each due to higher-thanexpected impact of MFRS 16. No dividend was declared, as expected.

YoY, 1HFY20 core losses expanded to RM138.5m compared to core losses of RM48.9m in 1HFY19 largely due to: (i) higher MFRS 16 net impact of -RM53.5m, as well as (ii) weaker sales (-5%). The lower sales came from negative overall SSSG from: (i) China (-3.9% vs. -3% in 1HFY19) amidst stiff competition (ii) Malaysia (-1.0% vs. 1HFY19 of +5.2%) as last year’s sales benefited from the zero-rated tax holiday, and (iii) Indonesia (-8.0% vs. 1HFY19 of -0.7%), mainly due to severe competition faced in the market and generally a softer consumer spending sentiment while certain store/mall were undergoing renovation work which also impacted the traffic flow. Vietnam’s SSSG rates (-11% vs. 1QFY19 of -19.6%) continued to stay in the red due to intense competition, especially with the launch of Vincom Center Landmark 81 Mall. Nevertheless, 53%-owned Parkson China recorded higher operating efficiencies, reporting an operating profit of RM91m (+213%) and the Malaysia operation recorded an operating profit of RM28m, turning around from an operating loss of RM1m in 1HFY19, which more than offset other region’s losses to record an EBIT of RM83m.

QoQ, 2QFY20 sunk deeper into core losses of RM93.9m, compared to core loss of RM44.6m despite seasonally stronger year-end sales (+11%) on higher finance costs (lease finance charges recognition under MFRS 16), as well as higher tax expenses.

Outlook. Management noted that the recent Covid-19 outbreak is affecting footfalls to its retailing stores, and the group will continue to implement measures which include: (i) optimising its retail format, expanding product and services offerings, and (ii) minimising stores losses via optimising store effectiveness and efficiency. As of December 2019, the group’s department stores network comprises 41 stores in China and 62 stores in South-East Asia, including Malaysia (43 stores), Vietnam (4 stores), and Indonesia (15 stores). Note that, Parkson has ceased its Myanmar operation with the closure of its sole store in 2QFY19.

We revised our FY20E-21E earnings to core losses of RM380.9mRM270.9m from core profits of RM8.5m-RM9.9m to reflect the higherthan-expected net impact of MFRS 16 as well as the severity of Covid-19 outbreak impact on its main China operation for the rest of the financial year.

Cease coverage. Overall, we remain cautious over the group’s alarming expanding losses over the years against the backdrop of an unfavourable business landscape especially for its PRA operation which is constantly at risk. Should sentiment or outlook improve, we may seek to resume coverage in the future. The stock is now a NOT RATED (from MARKET PERFORM), with our last SoP-derived TP of RM0.145 (from RM0.220)

Source: Kenanga Research - 27 Feb 2020