Saturday, March 26, 2011

Re-assessing Parkson prospects

My investment in Parkson failed to achieve my 10% p.a. share price appreciation target. It is about time that I reassess my original investment thesis.

Parkson Holding holds about 55% interest in Parkson Retail Group listed in Hong Kong Stock Exchange. Parkson Retail contributes as much as 71% revenue in FY 2010 but used to be a lot higher prior to 2007. As such Parkson Retail was more or less the mirror of Parkson Holding prospects. Parkson Retail was having fantastic growth(see below). They were having more than 40% growth rates prior to 2007 due to very rapid stores expansion and economy was doing very well. Growth rates moderated (10-15%) in the last 2-3 years. And that disappointed a lot of investors. Since then, the share price of Parkson Holding and Parkson Retail have been see-saw going no where.

2 - 3 years of price going nowhere is a very testing time because what is obvious to a lot of people is that the stock is fully valued for 2011, may be 2012 too. The management credibility is a bit dented because they keep saying they will open more stores but the pace has been slow.

As a retail investor relying heavily on annual reports, here is what I can assemble to analyze Parkson's recent growth.

A few pointers,

1. Top line has been growing only at 10% and a disappointing single digit 5% in FY 2010.
2. Slowing top line has impacted their bottom line growth as well.
2. They have been opening only 2-3 stores in China as opposed of 4 - 5 stores.
3. The pace of expansion in Malaysia and Vietnam has been ............ rather slow.

What I don't like about Parkson management is they have been very stingy in providing information. They at least should let us have the lettable retail floor space for us to do meaningful analysis. That has handicapped me and the closest analysis that I can come out is revenue/store and pre-tax profit per store. Average revenue per store is about 30 mln generating about 10 mln pre-tax profit. ( Will need to use this number later).

I have an entry price of RM 6 in 2008 and to achieve my 10% return per year, by 2013 Parkson Holding share price needs to be around RM 10. To achieve RM 10, it would need at least EPS of 0.67/share selling for 15X PE. To do 0.67 EPS, it will need at least about have growth of 20-25%, implying at least 15% same store growth and at least 4 - 6 new stores. Possible but I don't put too much hope for this scenario for margin of safety reason.

If the same store growth is anaemic, only 10% growth and they open 4 - 6 stores per year, I will be doomed. Extrapolating 700 pre-tax(FY 2010) with 6 stores/year for the next 3 years will give me approximately pretax of 1 bln and estimated after tax profit attributed to equity holders will be around 0.39/share(1,036 mln*.75 nett of corp tax*.53 effective interest/1,036 mln outstanding shares). Share price could be in the region of 5.85 to 7.8. My potential return could be 0 - 6% p.a., dividend not included.

Looking back, I was relying too much on the past growth rates to set my entry price of RM 6. At hindsight, I was also relying too much of my assumption: big population, high urbanization = high growth. Analysts sing the same song for their Indonesia venture recently. The key issue really is how fast they can open more stores and whether they are also coincides with how well the general economy is doing(same store growth).

Don't get me wrong that I begin to feel bearish with the stock. In fact I still like the stock a lot but how much should I pay. If I were to pay for RM 5/share, I will have much higher chance of achieving 10% target.

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