Parkson Holdings - Making maiden foray into Sri Lanka

News  Parkson Retail Asia (“PRA”), a 67.6% owned subsidiary of Parkson Holdings (“Parkson”), has proposed to acquire 41.8% of Odel PLC, a 22-year old fashion retail company listed on the Colombo Stock Exchange for an aggregate value of RM34.5m from Gunewardene Family (“GF”). 

Upon completion of the proposed acquisition, PRA will be required to make a mandatory offer for all the remaining shares in Odel. However, PRA has received an irrevocable undertaking from GF that it will not accept the offer for its remaining 41.9%-stake after the disposal. Note that GF owns approximately 83.7% stake in Odel PLC before disposing to PRA.

After the above offer, Odel will undertake a 1:1 rights issue of shares at LKR20.00/share. PRA has undertaken to accept and subscribe for the entire rights share for expansion purposes.

   

Comments  We are positive on the news as the company has an opportunity to establish a  footprint in Sri Lanka and extend its department store chain into other parts of Asia. 

We  are  of  the  view  the  pricing  is  favourable  to  PRA as it is offering a P/B of 1.9x for Odel, which is relatively lower compared with PRA’s P/B of 6.9x. 

We also reckon that the company should not have any issue with the payment as PRA will still be on a net cash position of RM457m after the acquisition and rights issue subscription. 

Based on the latest FYE, Odel’s RM5.0m net profit will only contribute RM1.4m to Parkson (based on its stake), which is only about 0.4% of our current FY12E earnings estimate. Thus,  we  reckon  that  its contribution to Parkson Holdings would be minimal.   

   

Outlook Better earnings prospect are expected on the back of its new stores expansion plan with the management’s vision  to  maintain  the  SSSG  of  7-9%  for  China,  8-10% for Malaysia, 10% for Vietnam and 8-10% for Indonesia. 

In the meantime, potential M&A opportunities such as more retail property acquisitions like the above will enhance the company’s future earnings outlook.

   

Forecast We are maintaining our earnings estimates given the immaterial contribution from Odel at this juncture.

   

Rating Maintain  OUTPERFORM

   

Valuation  Our unchanged target price of RM5.44 is based on a SOP valuation. 

   

Risks Risk to our call is a slowdown in the global economy especially in China,  which will cut down the purchasing power of consumers.

Source: Kenanga