The recent sharp moves in department store stocks of Isetan and Parkson Retail Asia (Parkson) have prompted questions among investors if managements of both companies might be embarking on drastic changes to their respective corporate structures. Recent stock price movements might be driven by stock speculators trying to game on both counters.
While these are valid points made, managements of both companies have addressed that they were not aware of any major corporate events or factors that had caused huge impacts to their company’s respective stock prices.
While there could be anticipation among some investors about any upcoming actions that management might undertake, we review the companies’ fundamentals to see if speculation could be indeed the main driver for traders seeking to exploit the low liquidity nature of both company shares.
We will also take a look at S-Chip, Zhongmin Baihui Retail Group (ZBRG), for comparison purposes.
How Do The Department Store Stock Fundamentals Stand Out?
|Parkson Retail Asia||Isetan||Zhongmin Baihui Retail Group (ZBRG)|
|Price-To-Book (P/B) Value||0.54||1.0||3.6|
|Price-To-Sales (P/S) Value||0.047||1.4||0.75|
|Dividend Yield (%)||N/A||1.3||3.4|
|Dividend Yield (%) Five-Year Average||N/A||N/A||N/A|
|Enterprise Value ($’millions)||(17.3)||110.3||102.3|
|Price-To-Cash Flow (P/CF) Value||N/A||N/A||13.5|
|Price-To-Earnings (P/E) Value||N/A||N/A||17.5|
|Net Debt/ (Net Cash) $’millions||(42.6)||(21.3)||(41.0)|
Source: SGX StockFacts
Looking at the comparison table shown above, we note that all three department store stocks have negative net debt, and this is not surprising given the high cash nature of their businesses. But does low or no debt means that these three department store stocks are cash cows to keep?
We think it is not necessarily the case, as the ability to generate consistent positive earnings growth is still an important factor to consider. As the nature of operating department stores can typically be cost intensive and department store operators are walk a fine line to stay in the business. For instance, we have seen Isetan rationalizing to a lower store count in order to reduce its high operating overhead costs.
Comparing the three department store stocks, Parkson Retail Asia price-to-book value (P/B) multiple is still the lowest at 0.54 times. However, low P/B multiple does not necessarily suggest that the stock undervalued. Rather than following the herd, investors should see that the low valuations ascribed to Parkson Retail Asia and Isetan were due to the fact that both companies are not profitable. As such, investors should not be lured into the recent price run-up of the stocks.
How About Zhongming Baihui?
In terms of the common P/E, P/B and P/CF metric, ZBRG’s stock is trading at a higher valuation than the other two peers. This might also explain the recent sharp correction of the stock as opposed to Isetan and Parkway Retail Asia. Currently, the stock is trading at $0.73, near the lower price end of the 52-week range of $0.890 – $0.675. That said, ZBRG is a profitable company and its price multiples are not extremely rich.
Should Investors Avoid Department Store Stocks Altogether?
Investors should carefully ponder about the current business model of brick-and-mortar physical stores. With the advancement of various retail technologies including incorporating artificial intelligence (AI) to analyse customer purchasing behaviours, the constant focus to meeting customers’ needs will never change.