Parkson Retail Asia - Downgrade to Hold: Negative operating leverage

■ 1Q FY Jun 2016 represented a weak quarter marked by disappointing top line and negative SSSG

■ PRA continues to lose market share in Malaysia and Vietnam due to intense competition

Operations in Malaysia and Vietnam expected to be weak, cut target price from SGD0.88 to SGD0.30

Downgrade Parkson Retail Asia (PRA) to Hold with a TP of SGD0.30
We pare down our top line and EBIT margin estimates on the back of weak Malaysian and Vietnamese operations, reducing our TP from SGD0.88 to SGD0.30. We remain cautious given that PRA’s Malaysian operations registered an accelerated pace of negative same-store sales growth (SSSG) in the recent two quarters.

1Q FY16 results
Parkson Retail Asia’s total revenue, including other income fell 17.0% y-o-y in 1Q FY Jun 2016, driven by 17.0% y-o-y decline in Malaysia revenue and 21.1% y-o-y decline in revenue in Vietnam. SSSG was -15.2% and -3.6% in Malaysia and Vietnam, respectively, for 1Q FY Jun 2016. While gross margin remained largely in line with our forecast, EBIT margin fell from 9.5% in 1Q FY Jun 2015 to 2.5% in 1Q FY Jun 2016 as a result of negative operating leverage and poor performance of newly opened stores. PRA’s results also received a boost from the partial disposal of a subsidiary in Vietnam. Adjusting for non-recurring gains, net income fell 63.6% to SGD2.5m in 1Q FY Jun 2016 versus SGD6.9m in 1Q FY Jun 2015. PRA continued to lose market share in its key Malaysian and Vietnamese markets due to intensifying competition.

Technical Analysis
Daily Chart
Hold on
While PRA has been losing market share in Malaysia since 2010, the pace of market share losses has abated and has been relatively stable at around 13.7% since 2014. PRA remained the number two player in the mixed retailer segment in Malaysia. Given that PRA has lost 83% of its share price since 2013, the bad news appears to be baked into the price and further downside looks limited. For us to become more enthusiastic on the name, we would like to see a rebound in the core Malaysian market, coupled with good cost control. Given the weak consumer sentiment in Malaysia as a result of weaknesses in the ringgit and political uncertainty, we do not expect a dramatic turnaround in PRA in the near term. Thus, we downgrade our rating to Hold. Our target price of SGD0.30 represents 3.6x (19.5x ex one-off items) 2016e PE and 2.4x 2016e EV/EBITDA multiple. (Read Report)

Source : HSBC Global Research

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