Period  4Q14/FY14

Actual vs. Expectations The reported FY14 net profit of RM138m (-42% YoY) came in 19% below our estimate and 15% below consensus. However, stripping out provision for penalty arising from early termination of stores lease contracts in China with potential closure amounting to approximately RM46m, core FY14 net profit came in within expectation at RM184m (-23% YoY) or 5% above our forecast which we consider to be in line with our expectation.

Dividends  No dividend was declared during the quarter.

Key Result Highlights

 YoY, 4Q14 registered PATAMI of RM26.9m (-11%) backed by RM813m revenue (+1.5%). The flattish growth in revenue was due to negative SSS growth in China (-5.5%), Malaysia (-0.8%) and Vietnam (-5.4%) but mitigated by Indonesia (+4.3%) albeit a smaller base and the currency translation weakness especially for the Indonesian Rupiah. Due to start-up losses in China, Myanmar and Indonesia stores, 4QFY14 EBIT margin fell 7.9%-pts to 7.2% from 15.1% in 4QFY13.

 The weak SSSG rates in Malaysia was impacted by by inflationary pressure arising from the government’s implementation of subsidy rationalization programmes and the central bank’s tightening measures to curb household debt. There was also some drag to the performance of the Malaysia operations in the final quarter of FY14 due to the reduction in Chinese tourist arrivals into Malaysia.

 In Vietnam, discretionary retail spending remained weak despite signs of economic stability. Sales at stores in Hanoi were especially affected by the significant increase in new retail space amid a weak retail environment. The Vietnam operations for the final 4Q14 were also affected by negative consumer sentiment arising from the fallout of the China-Vietnam dispute and the resulting reduction of Chinese tourist arrivals into Vietnam.

 The strong SSSG rate for Indonesia was due to strong consumer sentiment. Centro and Parkson Indonesia as well as its store in Bali especially benefitted from increased tourist arrivals driven by the weak currency and improved flight connectivity.

It remained the sole bright spot to deliver a SSS growth of 6%.

 For FY14, overall all countries registered weak SSSG growth except Indonesia (+6%). China (-7%), Malaysia (-0.1%) and Vietnam (-4.2%) recorded negative SSSG rate. FY14 core net profit fell by 23% due to: (i) one-off provisions for store closures in China of approximately RM46m, (ii) start-up losses from new stores in Indonesia and China, (iii) its China stores affected by subway construction as well as temporary closure of the Shanghai flagship store for major re-modeling, (iv) higher promotion expenditure incurred due to weaker market conditions and intense competition, and (v) a higher effective tax rate due to offshore interest expense, which is not tax deductible.

Outlook  Looking ahead, we expect Parkson to continue facing a tough operating environment on the back of weak consumer sentiment due to the economic slowdown, particularly in the China market, which contributes the crux of its earnings. Coupled with the intense competition from online shopping and oversupply of retail space, we believe it would be difficult for Parkson to reverse its SSSG’s declining trend given that these stores have reached maturity.

 Parkson will recognise an exceptional gain of RM110m or 10 sen/share which would increase its NTA by 9% from

RM1.16 to RM1.26 as at 30 June 2014 from the divestment of Festival City Mall, which is expected to be completed by 2H14.

Change to Forecasts  No changes to our earnings forecasts.

Rating & Valuation  We are upgrading our target price from RM2.48 to RM2.51 as we impute the consensus’ latest target prices for both its listed operating units (Hong Kong listed Parkson Retail Group Limited and Singapore listed Parkson Retail Asia Limited). Maintain Underperform.

Risks to Our Call  A stronger-than-expected economic recovery in China.

Source: Kenanga