Investment Highlights

• We maintain our UNDERWEIGHT recommendation on Padini Holdings with a lower FV of RM4.72 (vs. RM4.81 previously) based on a PE of 15x FY20F EPS. We have trimmed our earnings forecast for FY19F, FY20F and FY21F by 5%, 7% and 6% respectively to reflect a lower sales growth estimate. We believe valuations trading at 20.4x or +1.5SD to its historical 1-year forward PE have run well ahead of its growth outlook against a backdrop of an increasingly saturated domestic market.

• 1QFY19 net profit missed our expectations, accounting for only 9% of our and street’s full-year forecast. The variance against our forecast came largely from lowerthan-expected sales growth and EBITDA margin.

• An interim dividend of 2.5 sen/share was announced.

• Key highlights of Padini’s 1QFY19 results include:
  1. QoQ, its topline dropped 31% and PBT fell 67% on the back of a seasonally stronger 4QFY18 which benefitted from the Hari Raya festival sales.
  2. YoY, its topline grew 4.6% to RM329.8mil on the back of additional Brands Outlet stores totalling 54 outlets (vs. 49 stores in 1QFY18). We believe this was also lifted by the tax holiday season. However, PBT sank by 37% mainly due to rise in staff cost, rental and other operating expenses. GP Margins eroded by 3.2ppts from 43% to 40% YoY.

• As 1Q is seasonally weaker, we expect sequential earnings growth to be healthier, further buoyed by the plans to open 4 new stores in FY19F. However, we believe there will be a slight downward pressure stemming from Padini’s plans to temporary close down 5 stores in FY19. We are estimating a PBT margin of 13.8% for FY19F.

• We believe the domestic outlook remains unexciting as it has reached saturation as seen in the 2% SSSG decline in FY18. We estimate a flat SSSG for FY19F and FY20F. However, we believe that sales growth is largely tied to the consumer sentiment which has improved in recent quarters. A further improved consumer sentiment, especially of the B40 group, will bode well for Padini.

Source: AmInvest Research - 30 Nov 2018