PARKSON (5657) - Why Parkson Could Be A Value Trap

Parkson opened its first store at Sungei Wang Plaza in 1987. It is an Asian-based departmental store operator with an extensive network spanning across Malaysia, China, Vietnam, Indonesia, and Myanmar.

Source: Bloomberg

Looking through Parkson's share price performance over the years, some investors might be wondering, is the company currently undervalued? Its share price has fallen significantly to RM 0.86 as of June 6, 2016. Is Parkson a bargain? or possibly a value trap? In this article, I will provide a few key points for you to consider before acquiring Parkson's shares.

Profits Under Pressure

Despite increasing revenue in the past 3 years, Parkson's profitability has been facing significant stress and finally dipped into the red in the latest quarter. High operating costs and stiff competitions, particularly from e-commerce, were the main contributing factors.

The decreasing profitability, of course, was very obvious to many investors, especially to those practising value investing. However, why are there still people buying into Parkson? The very reason being its high net cash position.

From the above table, Parkson's net cash position has shrunk from 48% of market cap to just 28% as of FY15. Interestingly, a veteran value investor in Malaysia mentioned that Parkson was attractive due to its strong balance sheet. Indeed, the company's balance sheet was and is still strong with cash surplus.

However, one needs to exercise caution when it comes to this situation. Earnings is the key driver to higher share price so, try to ask yourself, can the cash be used to generate more profits in the future? If not, I don't see the reason why its not paid out as dividends to its shareholders.

Net Debt ... Finally

True enough, Parkson's net cash position has become net debt in the latest quarterly result. After doing some ground works, I found out that some of Parkson's stores are not doing well as compared to its peers. Customer flows were extremely bad in a few local malls and deterioration in fundamentals have turned its advantage into disadvantage. 

Clearly, the business is facing high pressure from e-commerce, lack of competitive advantages, incurring high operational costs and other forms of competitions. Personally, I don't think it's worthwhile to invest despite of its high net cash position. If this weakness persist, I foresee that its net debt position will continue to take charge and Parkson's borrowings will eventually starts to build up. 

In conclusion, I think it's kind of hard for Parkson to turnaround if the management continues what they do currently with no changes to its business model. If the results have been disappointing for many years, with the same management team in charge, how likely is it that they can do something different to turnaround? This is a question worth giving a thought. I may be wrong, so please transact at your own risks and exercise your judgement before investing.

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