Is Parkson Retail Asia Pte Ltd’s 21% Dividend Yield Too Good to Be True?

When it comes to dividend yields, Parkson Retail Asia Pte Ltd (SGX: O9E) has one of the highest in Singapore’s stock market.

Based on the company’s latest financials – for the fiscal year ended 30 June 2015 (FY2015) – it had a total dividend of 6.0 Singapore cents per share. At its current share price of S$0.28, it has an eye-popping dividend yield of 21%.

For some perspective, the SPDR STI ETF (SGX: ES3), which tracks the fundamentals of Singapore’s market barometer the Straits Times Index (SGX: ^STI), has a yield of only 3.2% currently.

The business

Parkson Retail Asia, as its name suggests, is involved in the retail industry. It runs bricks-and-mortar departmental stores (and just one supermarket) in a number of Asian markets including Malaysia, Vietnam, Indonesia, and Myanmar.

The company has a network of 66 stores at the moment (as of 30 June 2015), which are mostly housed under its namesake Parkson’s brand. These stores have a collective retail space covering more than 640,000 square metres.

An important question: Hidden opportunity or value trap

Parkson Retail Asia’s awesome dividend yield will likely cause many investors to stand up and take notice. There are things to like about the company. For instance, it has been ramping up its dividends over the past few years, as you can see from the table below. In addition, Parkson Retail Asia’s balance sheet is rock-solid – as of 30 June 2015, there was S$125.98 million in cash and just a tiny S$0.73 million in borrowings.

Fiscal year Dividends per share
(Singapore cents)
FY2015 6.6 (include 4 cents special dividend)
FY2014 5.5 (include 3 cents special dividend)
FY2013 2.7
FY2012 3.3

Source: SGX Stockfacts

But, there are some important issues to note. In FY2015, there was a special interim dividend of 4.0 cents per share – strip that out, and Parkson Retail Asia’s yield falls to 7.1%. That’s still attractive, but it’s a far cry from the strong double-digit yield that’s seen at first glance.

Moreover, Parkson Retail Asia has such a high yield now partly because its shares have fallen by around two-thirds from a 52-week high of S$0.89 that was reached nearly a year ago. Interestingly, Parkson Retail Asia’s dividend yield (excluding the 4.0 cents special interim dividend) would drop to a paltry 2.2% at the 52-week-high price of $0.89.

An excerpt from Parkson Retail Asia’s latest earnings release – see chart below (click for larger image) – shows that its profits have been declining since peaking in FY2012. Tough economic conditions in countries like Malaysia and Vietnam have weighed on Parkson Retail Asia’s numbers.

Parkson Retail Asia's EBITDA and profit picture

Source: Parkson Retail Asia’s earnings release

The retail outfit’s FY2015 net profit figure is a little misleading. There was a loss of S$34.7 million largely because of a contingency expense of S$64.7 million clocked in the fourth quarter that is related to the early-termination of a lease for a store in Hanoi. But even if the one-off loss was adjusted for, Parkson Retail Asia’s profit for the year would come up to around S$30 million, which is still down compared to FY2014.

If Parkson Retail Asia can’t pull up its socks to post higher profits in the future, its dividends in the years ahead may well shrink. If so, shareholders could suffer.

Foolish Summary

Tan Sri Cheng Heng Jem, the executive chairman of Parkson Retail Asia, is aware of the challenges that lie ahead. In the firm’s FY2015 annual report, Cheng had highlighted several measures that the company will be undertaking to rejuvenate the business:

Going forward, [Parkson Retail Asia] is taking measures to improve performance, such as boosting same-store sales growth with aggressive target marketing activities, enhancing overall productivity, revamping merchandise assortments and range, as well as improving efficiency in operational costs.

Will these be enough for Parkson Retail Asia to turn the tide and keep up with its dividends before it eventually runs out of cash? Only time will tell.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.