Modest 1Q Growth ---- Results tak cantik
We retain our 3-STARS (Hold) recommendation on Parkson Holdings (PHB) after minor adjustments to our earnings projections following the release of 1QFY10 (Jun) results. PHB is trading at a 33% discount to the market value of its stake in its main subsidiary, Parkson Retail Group (PRG) (03368, HKD13.36, Not Ranked), which is close to the historical average of 27%. We believe PHB will continue to trade at a discount to PRG, given PHB’s smaller market capitalization and lower share liquidity relative to PRG.
1QFY10 (Jun) results were at the lower end of our expectations due to marginally weaker-than-expected contribution from the China operation, which is held via 51.6%-owned PRG. PHB's 1QFY10 net profit rose 8% YoY on the back of revenue growth of 3%. We estimate that PRG accounted for about 80% of PHB’s earnings. The China, Malaysia and Vietnam operations saw same-store sales (SSS) growth of 7.5%, 4% and 22% respectively in 1QFY10. Malaysia’s 1QFY10 SSS growth is within the full-year target of 3%-4%, while Vietnam’s is above the full-year target of 15%-20%. Meanwhile, PRG’s SSS growth of 7.5% in 3Q09 and 7.1% in 9M09 are
at the lower end of its 2009 target of a "high single digit" growth. Nonetheless, we expect growth to gather pace next year, as consumer demand improves in line with stronger economic growth.
PHB’s concessionaire rate fell slightly to 20.8% in 1QFY10 from 21.1% in 1QFY09, while the China operation’s concessionaire rate (via PRG) fell to 19.8% from 20.3%, due to promotions to drive sales. We expect fewer promotional activities as consumer sentiment picks up.
We have fine-tuned our forecast for PRG, resulting in a 3%-4% cut in our net profit forecast for PHB. We project a 3-year recurring net profit CAGR of 23% driven by PRG, which is targeting a floor space increase of 15% p. a.
PHB offers exposure to retail markets in three countries, namely China, Vietnam and Malaysia. In our view, PHB is well-positioned to benefit from rising purchasing power in China and Vietnam over the longer term. Management has extensive experience in the retail business and PHB is an early entrant into the fast-growing retail markets in those countries. In China, its first-mover advantage has enabled it to build a strong brand name and a nationwide network.
Meanwhile, with concessionaire sales accounting for 86% of merchandise sales, inventory risk is minimized.
Our 12-month target price of MYR5.50 is unchanged. Our target price continues to be based on a 25% holding company discount to the sum-of-parts (SOP) value, plus projected net DPS.
The 25% discount that we apply to our SOP value is close to the historical 27% discount that PHB trades to PRG in terms of the market value of its stake in the latter. In our view, the market value discount reflects PHB’s smaller market capitalization and lower share liquidity relative to PRG.
Our valuation of PRG is based on a combination of discounted cash flow and relative valuation. PRG’s relative valuation is derived from a target 2010 PER of 24x (unchanged). Meanwhile, our valuation of the Malaysia and Vietnam operations is based on a target FY11 PER of 8x.