Which one is the outstanding Parkson? (Part 3 of 3)
Value Investing Case Study 12-3: There are 3 listed companies within the PHB Group. In Part 1 and 2, I have shown that the PHB Group is not a value trap. In Part 3, I will address the question of which one to invest in if you were limited to investing in only one of them. I will also explore whether you should invest directly in the subsidiaries but with a different % shareholding than those held by PHB.
I have shown that Parkson Holding Bhd (PHB or PHB Group) is dependent on its two listed subsidiaries for the Group’s operations ie
- Parkson Retail Group Ltd (PRGL) listed on HKEX.
- Parkson Retail Asia Ltd (PRA) listed on SGX.
So the question of which listed company to invest in can be framed as investing in one of the following options:
- Direct shareholding in only either PRGL or PRA or PHB.
- Direct shareholding in some % of PRGL and PRA. The % in each need not be the same.
PHB, PRGL, and PRA (3 listed entities) are in the same industry with a similar business model. They also have the same ultimate controlling shareholder. As such I would use the following criteria to decide on the above options:
- Capital structure - this affects the cost of capital and hence the valuation.
- Business prospects.
- The margin of safety. This is because the market sentiments would be different for the 3 stock exchanges.
- Risks
Join me in Part 3 of this 3-parter series as I analyze how each of the 3 listed entities performs under each of the above criteria. I will also provide my conclusion on the best investing option.
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Contents
- Have they used their Funds in the Best Way?
- Do they have awesome Business Prospects?
- Which has the greatest Buying Opportunity?
- Will Shareholders’ Value continue to be created?
- How to minimize Risks and secure your Investments
- Pulling it all together
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Have they used their Funds in the Best Way?
The capital structure of the 3 listed entities as of 30 June 2020 is shown in the following table. In terms of the Total Capital Employed (TCE),- PRGL is about 84 % the size of PHB.
- PRA is only about 1/10 the size of PHB. You will note that PRA shareholders’ funds are negative due to the accumulated losses.
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| Table 1: Sources and Uses of Funds Notes (a) As PRGL does not provide quarterly financials, I have used the end of Jun 2020 as the most recent common point in time. (b) The conversion from SGD and RMB to RM was based on the conversion rate as of 30 June 2020. |
You can infer from the table that the non-PRGL and non-PRA operations of the PHB Group are about RM 450 million in terms of Net Operating Assets.
Do they have awesome Business Prospects?
As shown in Part 1 and 2, PHB is essentially a holding company with not many operations that are independent of PRGL or PRA.
You can get a sense of the comparative performance of the 3 entities from the table below. It compared the average performance over the last 3 years with those of 2011 to 2013.
- The performance of all the 3 entities has deteriorated due to the combined impact of digital technology and the economic slowdown.
- In terms of EBIT/Total Assets, PRA had the best performance from 2011 to 2013. At the same time, it had the worst results over the past 3 years.
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| Table 2: Financial Performance by subsidiaries Note: a) The values for each year were converted to RM based on the conversion rate at the end of the respective years b) The values for PRGL were based on the respective financial statements for the year ending Dec. For FYE 2020 it was extrapolated based on the half-year results for 2020. |
Both PRGL and PRA are in the department store business. But, PRGL faced the challenges of digital disruption earlier as described in the respective Annual Reports.
At the same time, PRGL and PRA focus on different regions. The retail industry in China is different from that in Malaysia. According to Trading Economics
- The retail sales growth in China averaged 13.05 % from 1993 until 2020.
- The retail sales growth in Malaysia averaged 7.71 % from 2013 until 2020.
The average growth rate in China more than doubled that for Malaysia. At the same time, China has a much bigger retail market compared to Malaysia.
- eMarketer estimated that the retail spending in China will hit USD 5.6 trillion in 2019.
- According to the Malaysian Department of Statistics, the Wholesale & Retail Trade Sector registered a sales value of RM1.27 Trillion 2018, equal to about USD 0.3 trillion.
Which has the greatest Buying Opportunity?
To compute the value and contribution of the listed subsidiaries to PHB, we could either analyze it:
- On a consolidated basis.
- On a Look Thru basis according to its corporate structure.
For consistency in my Earning Power Valuation, I used the average EBIT from 2011 to 2013 to represent the future “normalized earnings” for the 3 entities. At the same time, I also added back the revaluation surplus to derive the Asset Value
The estimated Asset Value and Earning Power Value of the 3 entities are shown in the table below.
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| Table 3: Group valuation Notes (a) Based on PHB Group consolidated accounts as per Part 2. (b) Refer to the Look Thru section. (c) Based on respective prices as on 26 Mac 2021 converted to RM. For PRGL it was RMB 0.275 and for PRA it was SGD 0.013. (d) Based on respective Balance Sheet as of end Jun 2020. (e) Assumed 55 % of the intangibles and revaluation surplus. |
Look Thru Valuation
I first covered a Look Thru valuation in the Wing Tai case study. I suggest that you look it up if you want a bit more info on it.
The Look Thru value of PHB Group is the proportionate value of PRGL and PRA as per the % shareholding in the corporate structure. The valuation process covered:
- Determining the value of the respective subsidiaries in the currencies of the respective subsidiaries.
- Converting the value to RM based on the exchange rate as of the end of Jun 2020.
- Flowing up the proportionate shareholding for each of the subsidiaries. For example, the EPV of PRA to PHB is 68 % of RM 199 million as can be seen from the chart below.
- Deriving the value of PHB Group as the sum of the respective proportionate shareholding. I then divided this value by the number of shares in PHB to arrive at the value per share.
To value the respective subsidiaries, I have to compute their respective weighted average cost of capital or WACC. This took into account the different equity risk premiums and the debt: equity ratio for the respective reporting currencies.
My valuation concept is based on Damodaran Free cash flow to the firm model. The chart below summarized the results.
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| Chart 1: Look Thru Analysis Note: Assumed that the Others as reported in PHB Annual report are 100 % owned by PHB and that the segment EBIT represents the contribution to the holding company. |
Based on the EPV, the value of PHB investments in PRGL is about 8.7 times larger than the value of its investments in PRA. Do not be misled by the % shareholding in PRGL and PRA as represented by the corporate structure.
If you consider the NTA as representing the intrinsic value, the above analysis showed that at the current market price, there is a large margin of safety for PRGL and PHB.
Will Shareholders’ Value continue to be created?
I assessed shareholders’ value creation based on the following:
- Comparing the after-tax return on Total Capital Employed (TCE) with the WACC.
- Comparing the growth in SHF assuming no dividend or share buyback with the cost of equity.
- Looking at total shareholders' return from investing in the shares.
As can be seen from the analyses below, there was no shareholder value created for each of the 3 listed entities during this period.
After-tax return on TCE
The average after-tax return on TCE for the period from FYE 2011 to FYE 2020 for the 3 entities is tabulated in the top half of Table 4.
The results showed that for all the entities, the returns were lower than the respective WACC. It indicated that shareholders’ value was not created during this period.
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| Table 4: Sharehoders' value creation Notes (a) Based on the average annual return for 2012 to 2020. Assumed that the marginal tax is the same for each year. (b) Based on the WACC used in deriving the Look Thru value. (c) Because of the impairments, the return is negative for 6 out of the 8 years. (d) Based on how the end 2012 shareholders funds would have grown assuming that there were no dividends and share buybacks. (e) Based on the cost of equity used in deriving the Look Thru value. |
Growth in SHF assuming no dividend or share buyback
For this metric, I looked at how the shareholder's funds (SHF) would have grown from FYE 2012 to FYE 2020 if there were no dividend payments or share buybacks. Note that I started from FYE 2012 as the IPO funds for PRA were only recognized in FYE 2012.
There would be shareholders’ value creation if the return exceeded the cost of equity. However, in the case of the 3 listed entities, the return did not exceed the respective cost of equity as can be seen from the bottom half of Table 4.
Total shareholders’ returns
For this metric, I assumed that a shareholder invested RM 1,000 in each of the listed entities at the end of 2011. I then looked at the total return to the shareholders if he held onto the shares till the end of 2020. The total returns here included the dividends and the share dividends received.
The results are summarized in the following table.
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| Table 5: Total shareholders' return Notes (a) Based on the respective exchange rate at the end of 2012. (b) Based on RM 1,000 (c) The number of shares at the end of 2020 is based on the following share dividend distribution based on 242 initial shares. Note that there were several tranches of distribution in 2015 and what is shown is the total for the year.
(d) Based on dividends for 2012 and 2013 of RM 0.34 in total. There was no dividend from 2014 onwards (e) Based on total RMB 0.35 per share from 2012 to 2020 converted to RM 0.193 at the respective year exchange rate. Assumed zero dividends for 2020. (f) Based on total dividends of SGD 0.177 for 2012 to 2020 converted to RM 0.488 at the respective year exchange rate. (g) No of share X share price. (h) Share value end 2020 + dividends - RM 1,000 |
Over the analysis period, the share price relative to the book value of all 3 entities has dropped significantly as can be seen from the chart below. You should not be surprised that the gain by the respective shareholder would be negative.
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| Chart 2: Price to Book multiple |
How to minimize Risks and secure your Investments
I see 2 risks for any investors in the 3 listed entities - privatization and digital challenge.
I have covered the digital challenge in Parts 1 and 2. PRGL and PRA seemed to be making progress to meet this challenge. While the jury is still out, I am confident that the 3 entities would not go the way of the Malaysian newspaper industry.
The main risk issue is privatization.
The Chairman controls 59 % of PHB and it would cost him about RM 88 million to take it private at the current market price.
PHB does not have much cash at its company level to undertake privatization via a capital reduction plan as the bulk of the cash is at the PRGL level. The Chairman and/or the Lion Group has to seek funding for such an exercise.
I do not see the privatization of PHB as a key risk for the following reasons
- The other business of the Lion Group - steel, property - are also facing challenging times. I don’t see the controlling shareholder and or the Lion Group using up the cash to privatize it.
- If there was any interest in taking it private for relisting later, it would have been done when the share price was very much lower.
- Given the revaluation surplus, I do not see any minority shareholders voting for privatization at the current market price.
At the same time, I do not see the possibility of taking PRA private. Under SGX guidelines, any privatization of PRA has to be at a fair price. I read this as an offer price being close to Book Value or NTA. There is no financial reason to take PRA private based on such a price.
But PRGL is a slightly different story.
Given the current market price and 55 % ownership, it would cost PHB about RMB 320 million to take PRGL private. Compare this with the RMB 2.2 billion cash held by PRGL.
HKEX does not have the “fair value” guidelines. It is possible for PRGL to be privatized by a scheme of arrangements - this is could be capital reduction based on PRGL's own funds.
Would PHB pursue this? I can think of some roadblocks to the privatization of PRGL.
- In the past PRGL has issued bonds which were then listed. PRGL would probably not want to lose this funding option given the expansion potential of China.
- While PRGL has RMB 2.2 billion cash, it also has RMB 3.1 billion of debt. I am not sure that it is prudent to use up the cash for a privatization exercise given that PRGL still has expansion plans.
- Given the revaluation surplus, I do not see any minority shareholders voting for privatization at the current market price.
Pulling it all together
How does PRGL stack against PRA?
- In terms of capital structure, PRGL looks better than PRA as it has higher cash and SHF.
- PRGL has better business prospects compared to PRA.
- In terms of intrinsic value, PRGL outweighs PRA given its revaluation surplus and better business prospects.
- However, when it comes to the historical creation of shareholders’ value, I am not sure whether there is any difference between PRGL or PRA.
- PRA has lower privatization risks compared to PRGL
If it was a choice between PRGL and PRA, I would opt for investing in PRGL.
But investing in PHB looks like a diversification strategy. From a risk mitigation perspective, it is better to invest in PHB compared to PRGL alone.
However, the other question is whether you should invest in PHB or directly in some % of PRGL and % of PRA. There are 2 perspectives here:
- Is there any advantage in holding shares directly in PRGL and PRA compared to just investing in PHB? This assumes that the shareholding is in the same proportion as PHB investment value.
- Would you invest in a different proportion in PRGL and PRA than those held by PHB?
The 3 entities are listed on 3 different stock exchanges. If you view that HKEX and SGD would have a better share market exposure than Bursa Malaysia, you should invest directly in PRGL and PRA rather than PBH. This is especially if you don’t see PHB adding any value to the operations.
Furthermore, the value of PHB investments in PRGL is 8.7 times larger than its investments in PRA. As such I would not invest in a different proportion even with a direct shareholding in PRGL and PRA.
As you can see, fundamental analysis is more than just applying some formula. If you don’t have the business background to undertake such an analysis and yet want to invest based on fundamentals, you may have to rely on financial advisers to do them for you.
There are several financial advisers who provide such analyses. Those who do this well include people like Seeking Alpha.* Click the link for some free stock advice. If you subscribe to their services, you can tap into their business analysis and valuation.
End of Part 3 of 3
Reading guide
If you are a first-time visitor to this blog, you may not be familiar with some of the concepts that I have used in my analysis and valuation. I suggest that you check up the Foundations series - Fundamentals 01, Fundamentals 02, and Fundamentals 03. I also have a Definitions page in case you are not familiar with the terms I have used.
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Disclaimer & Disclosure
I am not an investment adviser, security analyst, or stockbroker. The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies. Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them.
The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such.
I may have equity interests in some of the companies featured.
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