Investment Highlights

• We maintain our HOLD recommendation with an unchanged FV of RM3.75/share based on a P/E of 15x CY20F EPS.

• Domestic outlook remains lukewarm. We believe domestic growth will be hindered by increased competition in the fast fashion industry. We foresee the group’s store expansions to be minimal in FY20F on the back of its efforts to cut back on non-performing stores instead in order to reduce the drags in the group. The company currently has 55 Brand Outlet stores and 48 Padini Concept Stores.

• Instead, we believe Padini’s sales growth will be driven by improved product offerings. Padini is reshuffling its internal merchandising team in order to improve its merchandising strategy and better cater to its customers’ needs.

• Positively, we expect Padini now has a better negotiation power with its suppliers on the back of current global economic conditions. This will help ease its increasing cost of sales and pressure on margins.

• The group’s overseas operations are still in its early stages, currently with 3 stores in Cambodia and 7 stores in Thailand. As it is still in its gestational period, these operations are expected to remain a drag on the group’s profitability in FY20F.

• 1QFY20 results are expected to be weaker QoQ. We expect lower sales in the off-peak season of July–Sep. 1Q is typically Padini’s seasonally weaker quarter.

• We anticipate FY20F sales to be challenging due to an unexciting domestic outlook and saturation in the fastfashion industry. Padini will face margin pressures from the full-year impact of the SST (sales and service tax) implementation as well as the impact of the MFRS 16.

• Key risks to Padini include a deteriorating consumer sentiment, the weakening of the MYR against the CNY, and heightened competition from other fashion apparel retailers.

Source: AmInvest Research - 10 Sept 2019