Parkson to face tough operating environment in China, weak consumer sentiment
KUALA LUMPUR: Parkson Holdings Bhd (Parkson) is expected by analysts to face a tough operating environment in its China segment, its main revenue contributor, in addition to the subdued consumer sentiment, particularly in Malaysia.
According to the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research), China’s weak economy will continue to weaken consumer sentiments.
“Coupled with the intense competition with and from different retail formats and retail space oversupply, Parkson could face a tough operating environment in its China segment.
“Most of the China stores have also reached its maturity, rendering same store sales growth to possibly stagnate before any potential upward trend is visible,” MIDF Research said.
Meanwhile, the research arm noted that despite strong same store sales growth of eight per cent in the third quarter of financial year 2015 (3QFY15) which was mostly due to frontloading spending by consumers prior to goods and services tax (GST) implementation, consumer sentiment in Malaysia will remain subdued.
It further noted that this is mostly due to the GST, lack of a wealth effect, and weaker sentiment as a result of the depreciating Ringgit.
“Earnings for FY15 will be pulled by the loss in one of its subsidiaries’ arbitration dispute,” the research arm said.
MIDF Research believed that FY15 earnings will be dragged by the losses in the arbitration dispute between Parkson’s Hong Kong-listed subsidiary and its landlord in Beijing.
“This arbitral award will not impact Parkson’s business and operations in the future,” the research arm added.
Moving forward into FY16 and FY17, MIDF Research was expecting group sales to remain flat and subdued due to the overall weaker consumer spending and group specific challenges.
The research arm was anticipating a weaker yearover-year profit in FY16.
In addition, despite the weaker anticipated earnings, it foresaw a possibility that the company will continue to distribute dividends-in-specie (treasury shares) as cash conservation is paramount during challenging times.
With the tough operating environment in China and weak consumer sentiment in Malaysia, MIDF Research expected Parkson financial results to be uninspiring in the coming years.
The research arm reinitiated Parkson with a ‘neutral’ recommendation but with a downside bias on a target price of RM1.54 per share.
“We believe that the share price will continue to face more downward pressure and we also do not discount the possibility that future earnings might miss our forecasts,” it said.
MIDF Research’s target price was conservative as it has pegged the company’s earnings per share 2016 (EPS16) of 13.6sen to price earnings ratio 2016 (PER16) of 11.3-fold.
The research arm added that the target PER is premised on a two standard deviation discount to the company’s five rolling average PER over five years.