Investment Highlights

• We maintain our HOLD call on Padini Holdings (Padini) with an unchanged FV of RM3.75/share based on a PE of 15x on CY20F EPS. Our PE multiple is based on Padini’s average 5-year historical PE multiple.

• Padini’s 1QFY20 net profit of RM19.6mil (+9.2% YoY) accounted for 12.5% and 11.5% of our and street’s fullyear earnings estimate. We deem it to be in line as 1Q is typically its weakest quarter (1QFY19 made up 11.2% of FY19 earnings).

• An interim dividend of 2.5 sen/share was announced (same as in 1QFY19).

• Key highlights of Padini’s 1QFY20 results are:

• Padini’s 1QFY20 revenue grew 2.5% YoY mainly due to better sales in its existing stores as reflected in the samestore sales growth (SSSG) of 1% (0% in 1QFY19). We believe this was on the back of improved product offerings. Padini recently reshuffled its internal merchandising team to better cater to its customer’s needs. PBT inched up 0.9% YoY while PBT margin was flattish at 8.0%.

• Comparing 1QFY20 with 4QFY19, revenue sank 34.5% in the absence of festive periods. Padini recorded higher sales during the Hari Raya festival in June 2019 and the nationwide 5-day special sales promotion in 4QFY19. PBT tumbled 63.4% QoQ while PBT margin dropped by 6.3ppt.

• Padini’s gross margin grew 0.6ppt YoY and 1.7ppt QoQ to 40.5%. We believe this was driven by a slightly stronger MYR against the CNY (1.3% YoY; 2.4% QoQ).

• In 1QFY20, Padini was affected by the impact from implementation of the MFRS 16. Under the MFRS 16, the group’s finance cost and depreciation increased by RM6.1mil and RM24.6mil respectively. This was more than the rental cost of RM26.0mil. Net impact to its PBT was RM4.8mil.

• Padini’s effective tax rate dropped 5.5ppt to 27.0% as the group utilized deferred tax assets amounting to RM1.9mil in 1QFY20.

• We anticipate sales to improve sequentially due to seasonality factors such as Christmas season and year-end school holidays. However we believe its long term prospects will be challenging due to an unexciting domestic outlook and saturation in the fast-fashion industry and full-year impact of the SST (sales and service tax) implementation. Padini also faces margin pressures from the impact of the MFRS 16

Source: AmInvest Research - 28 Nov 2019