Parkson Retail Asia -
Recovery in progress
2Q14 showed continuance of the recovery trends seen in 1Q14. At 57% of our FY14 estimate, 1H14 EPS was in line as 2Q is seasonally stronger. Malaysia did well for a consecutive quarter. Vietnam and Indonesia still face challenges with new stores though it does not sound alarming and merely reflects growing pains. Inflation concerns in PRA's mainstay market, Malaysia, were cited as the key challenge for SSSG but we think PRA's mid- to upper-end target segment will be relatively resilient. We see no reason to be negative on PRA which is trading at 12x FY15 P/E, with net cash of 29.5cts. We maintain our Add rating and S$1.51 target price (20x FY15 P/E, based on peer average). Potential catalysts include the possible return of capital in FY15.
2Q14 quarterly trends comparison
Malaysia showed only flat SSSG (+0.2% yoy) as floods in the east coast of Peninsular Malaysia and a tuberculosis scare in Kota Kinabalu dented sales in the peak December month. As a country, Vietnam has seen economic stability but a recovery in discretionary spending is patchy and PRA's northern stores (Hanoi, Hai Phong) recorded negative SSSG, pulling down Vietnam SSSG to -2.7% yoy. Also, Vietnam was hurt by closed stores and competition from a new mega store. Indonesia was the relative bright spot (+7.3% yoy SSSG) though in terms of profitability, its 1H14 pretax contribution also shrank 12% on lower write-backs of retirement benefits vs. 1H13 and Rp weakness (Figure 1).
KL stores' resilience to inflation, regional turnaround later
Even as PRA expands out of Malaysia, pretax contribution from Malaysia has risen to 88% of total from 84% in 1H13 as contributions from Vietnam and Indonesia have been crimped by currency falls and gestation issues with new stores. Thankfully, Malaysia turned around in 1H14 (vs. 4Q13), despite floods and health scares. We see non-Malaysia stores pulling their weight in terms of pretax contributions only in FY15. Malaysia should hold up and see pretax growth from store expansion in 2H14, despite the headwind of rising inflation.
Maintain Add, more likely catalyst only in FY15
Operational improvements are slow but the stock's 12x P/E more than reflects that. We agree that immediate operational catalysts are not obvious. The bigger catalyst to position for is capital return - management dismisses that for FY14.
Publish date: 14/02/14