great biz .. KIV

More to come from Indonesia (CIMB)

Growth in Indonesia will ramp up in FY14, driven by the launch of the first ‘Parkson’ branded department stores. The larger store network will also boost margins and same-store sales growth (SSSG). However, earnings are unlikely to excite in the near-term.

We resume coverage on Parkson Retail Asia (PRA) with an Outperform call. Our S$1.88 target price is based on 22x CY14 P/E (vs. previous 20x), which is on par with the average of department store retailers. The stock’s catalysts are earnings delivery in Indonesia, a turnaround in Vietnam and higher-than-expected SSSG.

Growth to ramp up in Indonesia

PRA’s expansion in Indonesia will ramp up with the launch of ‘Parkson’ branded department stores. The company has operated department stores under the acquired ‘Centro’ brand for the past two years. The group’s retail space is expected to increase by 57% in FY14, which is the highest in all its key markets. Despite the presence of a powerful incumbent, MAPI, in the mid-to upper-middle class segment in which PRA will compete, we are positive on its execution capability. We think that MAPI will probably become PRA’s concessionaire, which will benefit PRA as MAPI has the exclusive distribution rights for more than 100 international brands.

Profitability is also expected to rise, thanks to cost savings that will accrue from a larger store network.

Near-term earnings unlikely to excite

Near-term earnings are likely to be depressed by 1) a depreciating rupiah 2) a downturn in Vietnam 3) drop in consumer spending in Malaysia from the uncertainty caused by the election in 4Q. However, things appear to be picking up. Our strategists expect the rupiah to stabilise this year, and Vietnam SSSG is expected to be flat in FY13.

Consensus too high

We think that consensus’ sales estimates are too optimistic and require that 1) all new stores will be opened at the start of FY14, and 2) new store sales will immediately reach the level of mature stores. Maintain Outperform on solid SSSG outlook and earnings delivery from new retail space across Malaysia and Indonesia.