PARKSON_RETAIL_ASIA(PRA_SP)_UPGRADE_TO_OW_MOSTATTRACTIVELY_VALUED_IN_ITS_SECTOR-2013-01-13.ppt

,1.78,1.46,22,company report,consumer & retail multiline retail equity singapore,abc global research,parkson retail asia (pra sp),overweight target price (sgd) share price (sgd) potential return (%) note: potential return equals the percentage difference between the current share price and,upgrade to ow: most attractively valued in its sector pras stock has declined significantly in 4q12, largely due to concerns over a slowdown in vietnam pra now trades at a significant discount to its specific peer,the target price jun,2012 a 2013 e,2014 e,set, while its long-term growth outlook remains intact,hsbc eps hsbc pe performance absolute (%) relative (%),0.07 21.7 1m 19.2 14.8,0.08 19.0 3m 0.0 -3.6,0.10 14.6 12m 15.4 -2.8, upgrade to ow from n and raise tp to sgd1.78 from sgd1.55 on change in valuation methodology,note: (v) = volatile (please see disclosure appendix) stock correction overdone. pras stock price declined from sgd1.48 to a low of sgd1.20 from mid-november to mid-december, a 19% decline, on the back of its 1q fy june 2013 announcement of negative same-store sales growth in vietnam of -6.3% y-o-y due to economic weakness, which has led to a deterioration in consumer sentiment. we believe the correction was overdone, as pras long-term growth potential remains intact and vietnam only accounts for 8% of pras ebit. street overlooking pras capital efficiency. looking over the past three years, pra has,9 january 2013 permada darmono* analyst the hongkong and shanghai banking corporation limited, singapore branch +65 6658 0613 .sg view hsbc global research at: *employed by a non-us affiliate of hsbc securities (usa) inc, and is not registered/qualified pursuant to finra regulations issuer of report: the hongkong and shanghai banking corporation limited, singapore branch mica (p) 038/04/2012 mica (p) 063/04/2012 mica (p) 206/01/2012 disclaimer & disclosures this report must be read with the disclosures and the analyst certifications in the disclosure appendix, and with the disclaimer, which forms part of it,registered return on capital employed (roce) of 126%, 196% and 140% in fy june 2010-12, respectively, with no debt. its roce is the highest among its specific peer set. the stocks correction has resulted in pra trading at a discount to its peers market cap weighted sector average multiple. we think this discount will eventually disappear due to pras extremely capital efficient business model. valuation now attractive. pra currently trades at a 19.0x fy june 2013e pe vs. an average specific peer group pe multiple of 27.5x and at an fy june 2013e ev/ebitda of 8.9x vs. a peer average of 17.3x, implying a 31% and a 49% discount, respectively. we are changing our valuation methodology to dcf from a multiples-based approach to better reflect pras long-term growth potential, especially since its specific peer multiples, which were previously used as references, have appreciated significantly. key catalysts. acquisitions and faster store rollout reflected by pras excess cash level. hsbc vs. consensus. our target price is 6% above, while our 2013e eps is in line. downside risks include increasing competition, as well as the ability to secure new store sites. fx translation risks also exist from its operations in malaysia, vietnam and indonesia. general economic slowdown could also temporarily impact pras results. with this report, permada darmono assumes primary coverage of parkson retail asia. index straits times idx enterprise value (sgdm) 792 index level 3,225 free float (%) 25 ric pral.si market cap (usdm) 804 bloomberg pra sp market cap (sgdm) 989 source: hsbc source: hsbc,6,parkson retail asia (pra sp) multiline retail 9 january 2013 financials & valuation financial statements,key forecast drivers,abc,year to,06/2012a,06/2013e,06/2014e,06/2015e,year to,06/2012a,06/2013e,06/2014e,06/2015e,profit & loss summary (sgdm),malaysia revenue (sgdm),352,394,446,500,revenue ebitda depreciation & amortisation operating profit/ebit,451 76 -19 58,537 89 -20 69,673 111 -20 91,851 136 -23 113,vietnam revenue (sgdm) indonesia revenue (sgdm) cambodia revenue (sgdm) myanmar revenue (sgdm),45 54 0 0,60 76 8 0,81 119 22 6,116 177 42 16,net interest pbt,5 63,5 74,5 96,5 118,hsbc pbt taxation,63 -18,74 -21,96 -27,118 -33,dcf analysis,net profit hsbc net profit cash flow summary (sgdm),45 45,52 52,68 68,83 83,hsbc assumptions risk free rate (%),3.0,dcf, comprising fcf cagr 2013e to 2022e (%),11.1,cash flow from operations capex cash flow from investment,56 -29 -29,75 -45 -80,91 -43 -43,107 -48 -48,equity premium (%),5.0-7.0,terminal growth rate (%) wacc (%),4.3 8.0-10.0,dividends change in net debt fcf equity,-20 -95 31,-20 25 30,-23 -26 48,-37 -23 59,balance sheet summary (sgdm),sensitivity and target price range (sgd),intangible fixed assets tangible fixed assets current assets cash & others total assets operating liabilities gross debt net debt,0 88 283 190 415 175 0 -190,0 113 276 166 468 175 0 -166,0 136 322 192 538 177 0 -191,0 161 357 214 562 118 0 -214,cost of capital vs. terminal growth rate 10-12% 9-11% 8-10% 7-9% 6-8%,3.5% 1.26 1.42 1.64 1.94 2.40,4.3% 1.33 1.52 1.78 2.17 2.81,5.5% 1.47 1.73 2.12 2.78 4.09,shareholders funds,238,290,357,440,invested capital,48,90,186,valuation data,year to,06/2012a,06/2013e,06/2014e,06/2015e,ratio, growth and per share analysis year to 06/2012a y-o-y % change,06/2013e,06/2014e,06/2015e,ev/sales ev/ebitda ev/ic pe*,1.8 10.5 144.3 21.7,1.5 8.9 16.3 19.0,1.1 6.9 8.5 14.6,0.9 5.7 4.2 11.9,revenue ebitda operating profit,22.7 22.3 22.0,19.2 15.9 19.7,25.3 25.7 31.8,26.4 22.1 24.2,p/nav fcf yield (%) dividend yield (%),4.2 3.1 2.1,3.4 3.1 2.4,2.8 5.1 3.1,2.2 5.9 3.8,pbt hsbc eps,21.2 14.4,18.1 14.5,29.7 29.7,22.9 22.9,note: * = based on hsbc eps (fully diluted),ratios (%),price relative,revenue/ic (x) roic roe roa ebitda margin operating profit margin ebitda/net interest (x) net debt/equity,340.9 3123.0 25.2 12.9 17.0 12.8 - -79.0,19.9 184.0 19.7 12.1 16.5 12.9 - -56.5,9.7 94.4 20.9 13.8 16.5 13.5 - -53.0,6.2 58.8 20.8 15.5 16.0 13.3 - -48.2,2.5 2 1.5 1 0.5,2.5 2 1.5 1 0.5,net debt/ebitda (x) cf from operations/net debt,-2.5 -,-1.9 -,-1.7 -,-1.6 -,0 jan-11,jul-11,jan-12,jul-12,0 jan-13,per share data (sgd),parkson retail asia,rel to straits times index,eps reported (fully diluted) hsbc eps (fully diluted) dps nav,0.07 0.07 0.03 0.35,0.08 0.08 0.03 0.43,0.10 0.10 0.04 0.53,0.12 0.12 0.06 0.65,source: hsbc note: price at close of 07 jan 2013,2,parkson retail asia (pra sp) multiline retail 9 january 2013 high growth at lower multiples the market has been overly concerned about the slowdown in vietnam, leading to pra stock being a laggard in 2012 pras multiples now trade at a significant discount to its specific peer set upgrade to ow from n and raise target price to sgd1.78 from sgd1.55,abc,reversal of fortune parkson retail asia (pra) stock has underperformed the singapore straits times index by 11.2% and the msci asia ex japan consumer discretionary index by 5.5% in 2012 (see figures 1-2). the share price underperformance started around mid-november after pra announced its 1qfy june 2013 results, which experienced a drag in its,vietnam operation with negative same-store sales of -6.3% y-o-y as discussed in our report, vietnam weighs on group earnings. yet, vietnam only accounts for 8% of pras ebit in fy june 2012. since then, the valuation has declined from a 17.9x fy june 2013 pe to a 16.4x fy june 2013 pe as at 31 december 2012. in the first week of january 2013, the stock price has quickly rebounded from,figure 1: pra vs. singapore straits times index (rebased) underperformance 130 120 110 100 90 80,december-11,february -12,april-12,june-12,august-12,october-12,december-12,parkson retail asia,straits times index,source: bloomberg 3,parkson retail asia (pra sp) multiline retail 9 january 2013 figure 2: pra vs. msci asia ex japan consumer discretionary (rebased) 130 120 110 100 90 80,abc,dec-11,jan-12,feb-12 mar-12,apr-12 may -12,jun-12,jul-12,aug-12,sep-12,oct-12,nov -12 dec-12,parkson retail asia source: bloomberg, msci a low of sgd1.37 per share to sgd1.46 as at the close on 4 january 2013. we believe the market recognises the potential undervaluation of pra, hence the sharp price rebound. we believe the market is overly concerned about the slowdown in vietnam, which is principally caused by the negative same-store sales growth (sssg) of - 6.3% y-o-y in vietnam in 1q fy june 2013. this was driven by the economic downturn in the,msci asia ex japan cons disc pras stock to outperform its consumer discretionary peers in 2013. exceptional roe over the last four years, pra has steadily delivered improving return on equity (roe), increasing from 9.7% in fy june 2009 to 25.2% in fy june 2012. figure 3: pra roe (fy ending june),country, which has weakened consumer sentiment. we think this is now largely priced in and pras long-term growth potential remains intact. we maintain our revenue growth estimate of 19% in fy june 2013 to sgd537m from sgd451m in,30.0% 25.0% 20.0% 15.0% 10.0%,9.7%,16.6%,26.6%,25.2%,fy june 2012 and npat growth of 14.5% to sgd52.1m in fy june 2013 from sgd45.5m in fy june 2012. from fy june 2012 to fy june 2015, we forecast a revenue and npat cagr of,5.0% 0.0%,2009,2010,2011,2012,25.1% and 22.2%, respectively, reflecting continued strong growth potential with our growth driver assumptions being the malaysian and indonesian markets and the eventual recovery of the vietnamese consumer market. given what we perceive to be an over-reaction from the market to pras 1q fy june 2013 results announcement that has led to a stock price correction, we believe there is a good potential for 4,source: company data, hsbc however, we believe this masks the business true capital efficiency. measured using return on capital employed (roce) defined as ebit divided by average capital employed (shareholders funds + long-term debt + short- term debt cash), pras return on capital looks far more impressive.,parkson retail asia (pra sp) multiline retail 9 january 2013 figure 4: pras roce (fy ending june),figure 6: 2011 roce of pra and selected comparables without deducting cash,abc,250.0% 200.0%,195.9%,70% 60% 50%,61%,150.0% 100.0% 50.0%,52.5%,126.0%,140.2%,40% 30% 20% 10% 0%,21%,34%,13%,24%,24%,7%,aeon co,dairy farm,pra,ramay ana,alfamart,mitra,robinson,0.0%,adiperkasa,2009,2010,2011,2012,source: hsbc estimates,source: company data, hsbc pra generates its profits with little capital. it carries no debt and cash makes up 86.3% of book value as at 30 september 2012. thus, it only uses around 14% of its shareholders funds base to generate its earnings, highlighting a highly capital efficient business model. as can be seen in figure 5, pras roce was amongst the highest compared to a number of its peers in southeast asia. figure 5: 2011 roce of pra and selected comparables,even if we do not deduct cash in our roce definition, i.e., capital employed = shareholders funds + debt, pra still delivers a higher return on capital than its specific peers (figure 6). we believe the street has overlooked this fact and that pra should trade at a higher multiple than its current multiple. faster store rollout and acquisitions are in the cards pras cash reserve as at 30 september 2012 stood at 86% and 22% of book and market value,160. 0% 140. 0% 120. 0% 100. 0% 80. 0%,84.8%,140.2%,respectively. its high level of cash and no debt are extraordinary. investors should ponder why pra does not return some of this cash either via,60. 0% 40. 0% 20. 0% 0. 0%,29.8%,23.0%,32.1%,26.3%,10.9%,dividends or stock buyback. we believe the main reason for pra to hold such,aeon co dairy farm,pra,ramayana,alfamart,mitra,robinson,high levels of cash instead of returning it to,source: hsbc estimates,adiperkasa,shareholders via dividends is because it is on the lookout for further store expansion opportunities beyond what has already been announced, as well as acquisition opportunities, particularly in more developed consumer markets in southeast asia such as in the philippines and thailand, as these are likely to make a faster and a more meaningful impact on its top and bottom line than emerging markets such as cambodia, myanmar and sri lanka.,5,parkson retail asia (pra sp) multiline retail 9 january 2013 pra has announced seven new stores to be,figure 7: pra cash vs. book & market values (sgdm),abc,opened in fy june 2013 across malaysia, vietnam, indonesia and cambodia. the average opening cost for a new store is sgd2.4-3.6m. thus, the seven stores will cost a maximum of sgd25.2m to open.,1200 1000 800 600,989.00,pra has disclosed a capital expenditure plan of sgd45m in fy june 2013; sgd5m for existing stores and sgd40m for new stores. this leaves around sgd14.8m in its capital expenditure,400 200 0,214.81 cash,248.81 book value,market v alue,budget to be spent, which equates to a possible further four stores to be opened, either through new store openings or acquisitions. figure 8: scenario analysis assuming faster store expansion,source: company data, thomson one cash and book value as at 30 september 2012 we do acknowledge, however, that the possibility for incremental store announcement for fy june,fy june (sgdm) revenue malaysia vietnam indonesia cambodia myanmar total growth ebitda dep & amort ebit malaysia vietnam indonesia cambodia other total npat reported growth,base case 2013e 394 60 76 8 0 537 19.2% 88.6 -19.5 57.1 4.2 6.8 1.6 -0.6 69.1 52.1 60.0 14.5%,+1 store 2013e 400 60 76 8 0 543 20.5% 89.4 -19.5 57.9 4.2 6.8 1.6 -0.6 69.9 52.7 60.0 15.9%,+4 stores 2013e 405 60 76 8 0 549 21.8% 90.3 -19.5 58.8 4.2 6.8 1.6 -0.6 70.8 53.3 60.0 17.2%,2013 via organic growth could be remote, as it takes at least one year to set up a new store. as such, we believe any upside scenario is likely to come from acquisitions of stores or companies. pra certainly has the cash to do this. lower valuation makes pra an attractive buy in our previous note, vietnam weighs on group earnings, we valued pra on the basis of a weighted average of pe and ev/ebitda. we applied an 18.0x multiple to our forecast fy june 2013 eps, which was determined by using pras specific peers sector average pe multiple. similarly, our ev/ebitda multiple of 10.0x our forecast fy june 2013e was determined in the same manner.,source: hsbc estimates based on our analysis, each incremental store opened in malaysia could bring an extra sgd6m in revenue and sgd0.6m in npat. if pra opened two extra stores in malaysia, one extra store in vietnam and one extra store in indonesia beyond what has been announced for fy june 2013, the potential revenue and npat uplift could be up to sgd12m and sgd1.2m, respectively. 6,since then, the market cap weighted average 2013e pe of pra and its specific peers has increased to 27.5x, while the 2013e ev/ebitda multiple has increased to 17.3x. pras multiples trade at a 31% discount and a 49% discount from a pe and an ev/ebitda perspective compared to its specific peer set as can be seen from figure 10.,20.0,15.0,0.0,5,0,8-10%,11.1%,4.3%,28%,0%,3%,parkson retail asia (pra sp) multiline retail 9 january 2013 however, compared to the msci asia ex japan consumer discretionary index, pra trades at a 76% premium for pe and a 4.7% premium for ev/ebitda. this is largely due to the index having a large china/hong kong weighting and consumer stocks in china/hong kong have not performed well in general compared to their southeast asian peers in 2012. figure 9: pra multiples for target price in november 2012 vs. specific peers market cap weighted average in january 2013 30.0 27.5 25.0 18.0 17.3 10.0 10.0 5.0,the specific peer sector multiples now look overbought, especially compared to the msci asia ex japan consumer discretionary index as they trade at a 148% and a 74% premium, respectively, for pe and ev/ebitda. in contrast, we believe that pra should trade at higher multiples than its current multiples as its long-term growth outlook remains intact. the markets concern about pras vietnam operation, in our view, has created a buying opportunity relative to pras specific peer set. upgrading to ow and increasing target price to sgd1.78 we arrive at our target price of sgd1.78 per,abc,2013e pe nov -12 source: thomson one, hsbc estimates,2013e ev/ebitda jan-13,share by switching our valuation methodology to dcf to better reflect pras under-appreciated long-term growth potential. we also feel dcf is a more reliable way of valuing pra versus using multiples, given the fact that multiples are more,figure 10: pra vs. other comparables,susceptible to increases or decreases based on,30,27.5,investor sentiment. this can be seen clearly via,25 20 15 10,10.8,19.0,14.5,8.5,8.9,12.1,17.3,pras specific peer multiples that have increased significantly, driven by investors optimistic sentiment on retail growth prospects in southeast,asia. pras present multiples are now out of line,2013e pe msci asia ex japan cons disc straits times index,2013e ev/ebitda pra specific peer sector av erage,with its specific peers, rendering questions of what appropriate multiples should be applied to pra to derive its fair value.,source: bloomberg, thomson one, hsbc estimates in relation to the singapore straits times index, pra trades at a 31% premium for pe and a 26% discount for ev/ebitda. we think the premium is justified, given that consumer stocks in general trade at a premium compared to the broader stock market index as they tend to generate a higher amount of free cash flow with less need to incur debt compared to other more capital intensive business