12M17 core LATAMI which came in at RM179.2m compared to the core loss of RM152.6m in 12M16 is below expectations compared to our RM46m and consensus RM151m estimates. However, we believe the worst is over for Parkson and expect its FY18 to start on a clean slate following a kitchen sinking exercise and swift improvement in China’s operations. Specifically, this quarter marks the 2nd successive quarter of improvement in operating profit in China, highlighting that efforts including closures of underperforming stores and rationalization measure have reduced same-store’s operating expenses and bearing fruit. Maintain OUTPERFORM. Our target price is RM0.88 based on sum-of-parts.

Result Highlights. QoQ, 4Q17 revenue fell 8%, no thanks to Vietnam (- 14%). However, key markets registered positive same-store-sales growth including China (+2.4% vs. -2.2% in 1Q17), Malaysia (+14% vs -1.4% in 1Q17) and Indonesia (+11% vs. -18.2% in 1Q17). Malaysia and Indonesia same-store sales growth benefitted from Hari Raya festivities following the shift in festive calendar. The weakness in Vietnam continued due to competitive pressure. More importantly, 4Q17 China operations continued to show improvement registering second quarterly consecutive improvement due to positive SSSG growth, closures of underperforming stores and rationalization measure, which had reduced same store’s operating expenses. Specifically, 53%-owned Parkson China’s (FYE Dec) 1H17 recorded a core net profit RMB18,1m (RM11m). Excluding impairment loss on PPE, intangible assets, and other receivables amounting to an expected aggregate of RM70m, 4Q17 core net loss is flat at RM26.0m compared to a loss of RM25.8m in 3Q17 (excluding one-off impairment losses on receivables amounting to RM7.5m and stripping out gains from disposal of a subsidiary at approximately RM330m) arising from elimination of loss-making stores’ closures and lower operating expenses. No dividend was declared in this quarter as expected. No dividend was declared in this quarter as expected.

YTD, 12M17 revenue rose 2% mitigated by narrowing negative SSSG in China (-1% vs -10% in 12M16) due to its transformational strategies undertaken, which are bearing fruits, including aligning with the evolving retail markets and closures of underperforming stores. This brings 12MFY17 China operating loss has narrowed considerably to RM42m from RM91m in 12MFY16. SSSG rates were mixed across the board, including Malaysia (+3% vs -6.5% in 12M16), Vietnam (-14% vs. -2.9% in 12M16) and Indonesia (-2% vs. +4.7% in 12M16). However, Parkson 12M17 core losses widened slightly to RM179m after stripping out: (i) gain from disposal of a subsidiary, and (ii) impairment loss on intangible assets and receivables (RM352.4), and (ii) impairment loss on receivables amounting to RM60-70m (Parkson Holdings’ effective stakes).

Outlook. The Group focuses on delivering its transformational strategies closely aligning with the evolving retail markets, which include: (i) enriching its retail format and expanding its product and services offerings, (ii) optimising store effectiveness and efficiency, and (iii) enhancing cross platform experience for its customers. Specifically, the first Parkson Newcore Citymall was officially opened in January 2016 in Shanghai, which offers value-for-money products in a vibrant, energetic and innovative shopping environment. Sales of this Korean-themed outlet increased visibly in 2016 compared to the year before. In South-East Asia, operating environments in the Southeast Asian region are anticipated to remain challenging due to the fragile consumer sentiment. The Group will exercise vigilance in pursuing its strategies to transform Parkson into a life-style concept retail business.

Maintain Outperform and target price at RM0.88. We like Parkson because: (i) its strategy of optimising its retail format and expanding its product and services offerings is paying off, (ii) it is minimising stores losses via optimising store effectiveness and efficiency, which are bearing fruits, and (iii) 2Q17 China operating profit is showing encouraging signs of improvement

Source: Kenanga Research - 28 Aug 2017