Investment Highlights

• We maintain our UNDERWEIGHT recommendation on Padini Holdings with an unchanged FV of RM3.42/share based on a PE of 15x FY20F EPS.

• Padini’s 9MFY19 net profit of RM105.7mil (-12.6% YoY) met both our and street’s estimates, accounting for 73.5%– 70.9% of full-year forecasts respectively.

• An interim dividend of 4.0 sen/share was announced (4.0 sen in 3QFY18).

• Key highlights of Padini’s 3QFY19 results include:

• Comparing 3QFY19 against 2QFY19, topline grew 2.5% to RM474.2mil. We believe the growth was driven by the Chinese New Year festive season.

• However, EBITDA dropped 30.4% QoQ to RM58.0mil in 3QFY19 (RM83.4mil in 2QFY19) while EBITDA margin slid 5.8ppts to 12.2%. This was partly attributed to a bonus payout in 3QFY19.

• 9MFY19 topline rose 5.5% YoY to RM1,266.6mil (vs. RM1,200.9mil previously). This was mainly attributed to the sales generated from four new stores that were opened in 4QFY18.

• Padini’s gross margin slipped 1.9ppts to 39.3% in 9MFY19 (41.2% in 9MFY18). In FY18, gross margin was supported by a reversal of inventories written off amounting to RM23.2mil. This was not repeated in 9MFY19. Also, a rise in staff cost, rental and store operating expenses contributed to a YoY decline in Padini’s EBITDA margin, which shed 1.7ppts to 14.2% (15.9% previously) in 9MFY19. This resulted in a 6.0% YoY decline in the company’s EBITDA to RM179.3mil in 9MFY19 (RM190.7mil in 9MFY18).

• Moving forward, we expect revenue in 4QFY19 to be supported by the Hari Raya festive season. However, we believe the domestic outlook remains unexciting as the fast fashion industry has reached saturation as seen in the 2% SSSG decline in FY18.

• We believe that sales growth is largely tied to the consumer sentiment, which bodes poorly for the company as the consumer sentiment index has fallen to 85.6 in 1QCY19. As such, we anticipate Padini’s SSSG to be slightly negative for FY19F and FY20F.

Source: AmInvest Research - 29 May 2019