Parkson Retail Asia

HSBC RESEARCH, Aug 26

PARKSON Retail Asia (PRA) posted a revenue decline of 2.3 per cent y-o-y in Q4 ended June 2014 (-2.8 per cent y-o-y for the full year) on the back of negative same store sales growth (SSSG) of -0.8 per cent and -5.4 per cent in Malaysia and Vietnam, respectively. Discretionary retail spending in both countries stayed weak, with consumer sentiment remaining subdued.

Despite the revenue decline, gross profit grew by 3.9 per cent y-o-y (+0.5 per cent y-o-y for the full year) to S$65 million as the gross margin expanded to 62.6 per cent in Q4, FY14 from 58.8 per cent in Q4, FY13 due to reduced discounting and less stock shrinkage. However, operating expenditure grew at a faster pace - at 5.1 per cent y-o-y (+3.3 per cent y-o-y for the full year) to S$56 million - primarily due to costs attributable to new store openings.

As a result, Ebit declined by 9.6 per cent y-o-y in Q4, FY14 (-11.4 per cent y-o-y for the full year) to S$3 million and NPAT (net profit after tax) decreased by 35.9 per cent y-o-y to S$3 million (-12.5 per cent y-o-y for the full year) due to lower net interest income.

The full year results were broadly in line with our estimates as we had anticipated a weak FY June 2014. In line with our expectations, PRA's dividend yield jumped to 6.5 per cent as it paid out 108 per cent of its earnings (as it believes the level of cash on the balance sheet is more than adequate).

Fiscal year 2015 is likely to deliver better results.

FY June 2014 marked the second consecutive fiscal year of profit decline for PRA. While we anticipate that the retail environment will remain weak in Malaysia and Vietnam for the remainder of the calendar year, we think the second half of FY June 2015 could mark a turning point for the company's performance.

We raise our revenue forecasts by 2 per cent and our NPAT estimates by 6 per cent for FY June 2015-16. We believe our FY June 2015 estimates are conservative as we only forecast a 3.4 per cent y-o-y increase in revenue and a 12.9 per cent y-o-y rise in NPAT. Our NPAT estimates are in line with Thomson Reuters Datastream consensus forecasts.

We reiterate our overweight call and raise our DCF (discounted cash flow)-based TP to S$1.12, from S$1.10, on the back of the above forecast changes as well as a DCF roll-forward. The key catalyst would be improving y-o-y performance, most likely in H2, FY15. PRA is currently trading at a 14.7 times FY15 estimated PE against a sector average of 26.3 times.

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