Investment Highlights

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

• The key takeaways from last Friday’s analyst briefing are as follows: 1. The group is expecting minimal store expansions in FY20F. This is 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. This is in line with our forecasts as we expect the group’s operations to be challenged by the saturation in the fast-fashion industry and full impact of SSST implementation. 2. Despite the challenges, the group expects 1HFY20 SSSG of circa 2% (vs. 4% in FY19), mainly 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. This is close to our expectations as we forecast a revenue growth of 2.4% YoY in FY20F (+6.2% YoY in FY19). 3. Padini now has a better negotiation power with its suppliers in light of current global economic conditions. This will help ease its increasing cost of sales and pressure on margins (-5.2ppts YoY to 14.8% EBITDA margin in FY19). 4. The group’s overseas operations incurred losses as it is 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. 5. Padini expects 1QFY20 results to be weaker QoQ due to lower sales momentum 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 and full-year impact of the SST (sales and service tax) implementation. Padini will also face margin pressures from 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 - 11 Sept 2019