Parkson Holdings - BUY - 23 May 2008

Parkson Holdings - Injection of managed stores to Parkson Retail (Company Update)



Price: RM6.60

Target Price: RM8.50

Recommendation: BUY



· Parkson Holdings (PH) is transferring 2 of its managed stores to Parkson Retail Group (PRG), its 53.5% subsidiary. Jet East Investments Ltd (a wholly-owned subsidiary of East Crest International that is in turn owned by PH) that owns 70% of Parkson Nanning and 100% of Parkson Tianjin, is being acquired by Grand Parkson Retail Group (a wholly-owned subsidiary of PRG).

· Disposal consideration of RMB240.0m (RM110.0m) to be satisfied by a combination of cash and new PRG shares. RMB120m (RM55.2m), half the consideration will be in cash while the remaining RMB120m (RM55.2m) will take the form of 1.99m new PRG shares. The new shares will be issued at HK$67.45 (at 6.1% discount to the average closing price of HK$71.86 over the last 5 days) and expected to be allotted to PH by September 2008.

· Acquisition PER of 11.3x and P/book of 17.7x for Parkson Nanning and Parkson Tianjin is slightly lower than the 16.8x PER PRG paid for a 49% share of the Xi'an Parkson store in March 2008. Proceeds from the disposal will be used by PH for working capital and investment.

· PH's stake in PRG to increase by a marginal 0.2% to 53.7% of enlarged share capital. The divestment will cause a slight dip in earnings by 0.2% from the loss of rental income from the 2 stores, and a one-off gain on disposal of approximately RM46.0m. FY09 FD EPS is expected to increase by 3.7 sen to 28.9 sen as a result.

· FY08 net profit forecast maintained as the disposal is only expected to be completed in September 2008. Revise FY09 net profit estimate upwards by 15% to RM223.2m to take into account the gain on disposal and marginal decline in MI.

· Re-iterate BUY recommendation with revised target price of RM8.50, based on our sum-of-parts valuation comprising PER valuations for China, Malaysia and Vietnam. Potential earnings upside to come from the firm's aggressive expansion into China and Vietnam.







KENANGA INVESTMENT BANK BERHAD (15678-H)