PARKSON (5657) - Parkson Holdings: Attractive Valuations At 10X PE?
Department stores as its name suggests offers a wide range of consumer products in different categories all under one roof. While many local shoppers might not have heard of “Parkson” and “Centro” brands department stores since there are no operations here, there are a total of 120 stores operated under the brands located in Asia as of 30 June 2014.
To local investors though, the name Parkson might not be unfamiliar.
That’s because the department store chain is actually operated by Parkson Holdings (listed on Bursa Malaysia), through its subsidiaries, Parkson Retail Asia (PRA) and Parkson Retail Group (PRG), which are listed on the Singapore Exchange and Hong Kong Stock Exchange respectively.
Expansionary Strategy Faced With Rising Overheads
Parkson’s department stores can be found in Malaysia, Indonesia, Myanmar and Vietnam (operated by PRA) as well as China (operated by PRG). The Chinese market, which accounted for 67.6 percent of total turnover in FY14, is the firm’s largest market by sales.
In the past years, the group has engaged in an expansionary strategy, which saw its total store count (excluding associates) increase from 80 in FY09 to 120 in FY14. In tandem with the increase in total store counts, revenue grew at a compound annual growth rate of 6.6 percent from FY09 to FY14, to reach RM3,553.9 million.
However, net profit over the same period declined at 23.9 percent CAGR, from RM542.7 million in FY09 to RM139 million in FY14.
Source: Company Annual Reports, *Excludes associates
Examining closer, it appears that overheads are growing at a faster rate as compared to revenue growth, which is the main cause for the drop in net profit in recent years (especially so for FY13 and FY14). In particular, rental expenses rose faster than revenue each year from FY09 to FY14., contributing to the suppressed earnings.
Headwinds In The Retail Industry
China and Malaysia are Parkson’s two largest markets, contributing over 90 percent of total revenue in FY14. Headwinds have been detected in both markets, which could slow growth and negatively impact top and bottom lines.
In Malaysia, general sentiments towards the consumer sector have been weak. The consumer sentiments index (CSI) fell 15 points quarter-on-quarter in 4Q14 to 83 (a value below 100 indicates a lack of consumers’ confidence), against the backdrop of falling global oil prices that has caused the Malaysian Ringgit to retreat against major currencies.
Flat employment prospects and a softening of current and expected income are expected to further dampen consumer sentiments, according to RHB Research. Additionally, the implementation of the goods and services tax in April coupled with the abolishment of fuel subsidies (since December 2014) in the country could add to the drag on consumer spending.
Overall, economists at RHB estimate consumer spending to grow at a slower pace of 5.2 percent in 2015 (2014: 6.8 percent), amid prudent consumer spending.
Over in China, the ongoing austerity measures, slowdown in the domestic economy growth to the lowest in 24 years and rising competition from new retail formats are challenges identified by the management.
In my opinion, one of the biggest challenges faced by retailers like Parkson is the ubiquitous use of the Internet for online shopping in the China’s major cities. This can be seen from the popularity of websites like Taobao, Tmall and JD.com.
Youngsters are increasingly accustomed to the one-stop convenience offered by these online shopping portals, where they can get everything from grocery to fashion to electronics, with easy price comparison and free delivery services. Online retail portals are certainly disruptive forces for traditional retailers like Parkson.
To tackle the problem, the group has revealed plans to revamp its flagship store in China to improve performance as well as venture into the food and beverage landscape in the nation.
Negative Net debt
While looking through the company’s financials, I was surprised to find that dividend per share has been rising each year from FY09 to FY13, despite the decline in earnings. (In FY14, treasury shares were distributed as share dividend.)
Source: FactSet
The ability to maintain or even increase dividend per share can be attributable to its strong balance sheet. As of 30 September 2014, the company was in a negative net debt position of RM950.2 million (which means cash and equivalents exceeds total debt).
However, one negative point that should be highlighted is the firm’s interest coverage ratio, which fell below 1 to 0.56 in FY14 (a value below one could suggest that the firm might have issues repaying interest expenses).
Investors should monitor continue to monitor interest coverage ratio recover as it could suggest improving or deteriorating business for the company.
Valuation
Looking at the macro outlook and industry headwinds for Parkson, I am personally not that positive on the firm at this moment.
Analysts seem to also have a mixed view on the stock. Based on data on FactSet (as of 23 February), of the five research house covering the stock, three have ‘Sell’ ratings, while the other two each has the equivalent of a ‘Hold’ and ‘Buy’ rating on the stock.
Of the research houses, AmResearch seems to be the most positive on Parkson, noting that active share buy backs policy by management, should support share price and limit downside risk. Furthermore it opines that the company’s shares are trading at an attractive 10 times price to earnings on an ex-cash basis.
On future prospects, the closing down of underperforming stores (which partially impacted FY14 earnings) as well as revamping of existing stores could help improve performance going forward. The group’s plans to venture into integrated development to support its self-owned malls given the lower occupancy cost could also be a positive catalyst for the stock.
Department stores as its name suggests offers a wide range of consumer products in different categories all under one roof. While many local shoppers might not have heard of “Parkson” and “Centro” brands department stores since there are no operations here, there are a total of 120 stores operated under the brands located in Asia as of 30 June 2014.
To local investors though, the name Parkson might not be unfamiliar.
That’s because the department store chain is actually operated by Parkson Holdings (listed on Bursa Malaysia), through its subsidiaries, Parkson Retail Asia (PRA) and Parkson Retail Group (PRG), which are listed on the Singapore Exchange and Hong Kong Stock Exchange respectively.
Expansionary Strategy Faced With Rising Overheads
Parkson’s department stores can be found in Malaysia, Indonesia, Myanmar and Vietnam (operated by PRA) as well as China (operated by PRG). The Chinese market, which accounted for 67.6 percent of total turnover in FY14, is the firm’s largest market by sales.
In the past years, the group has engaged in an expansionary strategy, which saw its total store count (excluding associates) increase from 80 in FY09 to 120 in FY14. In tandem with the increase in total store counts, revenue grew at a compound annual growth rate of 6.6 percent from FY09 to FY14, to reach RM3,553.9 million.
However, net profit over the same period declined at 23.9 percent CAGR, from RM542.7 million in FY09 to RM139 million in FY14.
Source: Company Annual Reports, *Excludes associates
Examining closer, it appears that overheads are growing at a faster rate as compared to revenue growth, which is the main cause for the drop in net profit in recent years (especially so for FY13 and FY14). In particular, rental expenses rose faster than revenue each year from FY09 to FY14., contributing to the suppressed earnings.
China and Malaysia are Parkson’s two largest markets, contributing over 90 percent of total revenue in FY14. Headwinds have been detected in both markets, which could slow growth and negatively impact top and bottom lines.
In Malaysia, general sentiments towards the consumer sector have been weak. The consumer sentiments index (CSI) fell 15 points quarter-on-quarter in 4Q14 to 83 (a value below 100 indicates a lack of consumers’ confidence), against the backdrop of falling global oil prices that has caused the Malaysian Ringgit to retreat against major currencies.
Flat employment prospects and a softening of current and expected income are expected to further dampen consumer sentiments, according to RHB Research. Additionally, the implementation of the goods and services tax in April coupled with the abolishment of fuel subsidies (since December 2014) in the country could add to the drag on consumer spending.
Overall, economists at RHB estimate consumer spending to grow at a slower pace of 5.2 percent in 2015 (2014: 6.8 percent), amid prudent consumer spending.
Over in China, the ongoing austerity measures, slowdown in the domestic economy growth to the lowest in 24 years and rising competition from new retail formats are challenges identified by the management.
In my opinion, one of the biggest challenges faced by retailers like Parkson is the ubiquitous use of the Internet for online shopping in the China’s major cities. This can be seen from the popularity of websites like Taobao, Tmall and JD.com.
Youngsters are increasingly accustomed to the one-stop convenience offered by these online shopping portals, where they can get everything from grocery to fashion to electronics, with easy price comparison and free delivery services. Online retail portals are certainly disruptive forces for traditional retailers like Parkson.
To tackle the problem, the group has revealed plans to revamp its flagship store in China to improve performance as well as venture into the food and beverage landscape in the nation.
Negative Net debt
While looking through the company’s financials, I was surprised to find that dividend per share has been rising each year from FY09 to FY13, despite the decline in earnings. (In FY14, treasury shares were distributed as share dividend.)
Source: FactSet
The ability to maintain or even increase dividend per share can be attributable to its strong balance sheet. As of 30 September 2014, the company was in a negative net debt position of RM950.2 million (which means cash and equivalents exceeds total debt).
However, one negative point that should be highlighted is the firm’s interest coverage ratio, which fell below 1 to 0.56 in FY14 (a value below one could suggest that the firm might have issues repaying interest expenses).
Investors should monitor continue to monitor interest coverage ratio recover as it could suggest improving or deteriorating business for the company.
Valuation
Looking at the macro outlook and industry headwinds for Parkson, I am personally not that positive on the firm at this moment.
Analysts seem to also have a mixed view on the stock. Based on data on FactSet (as of 23 February), of the five research house covering the stock, three have ‘Sell’ ratings, while the other two each has the equivalent of a ‘Hold’ and ‘Buy’ rating on the stock.
Of the research houses, AmResearch seems to be the most positive on Parkson, noting that active share buy backs policy by management, should support share price and limit downside risk. Furthermore it opines that the company’s shares are trading at an attractive 10 times price to earnings on an ex-cash basis.
On future prospects, the closing down of underperforming stores (which partially impacted FY14 earnings) as well as revamping of existing stores could help improve performance going forward. The group’s plans to venture into integrated development to support its self-owned malls given the lower occupancy cost could also be a positive catalyst for the stock.
Pakson Holdings Price Chart, Source: FactSet
Armed with a bachelor in mathematics, Jia Hui keeps close tabs on the oil & gas, and manufacturing sectors in Singapore.
http://www.sharesinv.com
Armed with a bachelor in mathematics, Jia Hui keeps close tabs on the oil & gas, and manufacturing sectors in Singapore.
http://www.sharesinv.com
