Parkson Retail's recurring net profit dropped 11% to $10.3m

Here’s what to blame.

According to OSK, Parkson Retail Asia 1Q14 recurring profit of SGD10.3m (-11% y-o-y, +203% q-o-q) was above our SGD8.5m estimate.

Key positive was a better-than-expected margins recovery from 4Q13’s disappointing numbers, hinting a return to y-o-y growth momentum from 2Q14. Its share price has corrected 31% since our last update and we believe its riskreward tradeoff has since improved. Upgrade to BUY, with an unchanged SGD1.28 TP.

Here's more:

1Q14 revenue dips 4% y-o-y. Parkson Retail Asia (PRA)’s 1Q14 revenue fell 4% y-o-y to SGD109m, mainly due to renovation works at three stores in Malaysia ahead of the year-end peak shopping season in 2Q14, and store closure at The Mall, Kuala Lumpur. 1Q14 same-store-sales growth was weak at -0.1% in Malaysia, -1.1% in Vietnam and +3.9% in Indonesia due to sluggish consumer sentiment.

Nonetheless, management expects operating results to improve in the coming quarters, driven by the opening of three newly renovated stores in 2Q14. Malaysia remained the largest revenue contributor, accounting for 77% of total revenue and 90% of 1Q14 profit. Net margin contracts by a smaller 0.8ppt. Recurring margin contracted by 0.8ppt to 9.4% (our estimate: 7.0%), suggesting that the steep 3.0ppts contraction in 4Q13 was mainly due to a one-off effect arising from the country’s general election.

Subsequently, 1Q14 profit came in at SGD10.3m, trumping our expected SGD8.5m. Quarterly growth momentum to resume. The group’s good results ease our lingering concern over its margin pressure in 4Q13. Hence, we lift our FY14F/15F profit estimates by 4%/5% respectively. Going forward, we expect recurring profit to grow by 11%, 14% and 93% in the coming three
quarters respectively.