Investment Highlights

• We maintain our HOLD recommendation with an unchanged FV of RM3.75/share based on 15x CY20F EPS, which is in line with its average historical forward PE.

• Key takeaways from yesterday’s analyst briefing are as follows:

1. The group guided for minimal store expansions in FY20F. It has shuttered 2 stores in 1QFY20 [1 Brands Outlet (BO) and 1 Padini Concept Store (PCS)]. This is consistent with its previous guidance of putting more focus to cut back on non-performing stores to reduce the profitability drags in the group. The company currently has 54 BO stores and 47 PCS outlets.
2. Despite the challenges, the group achieved a 1.0% same store sales growth (SSSG) in 1QFY20, mainly driven by improved product offerings. We expect its SSSG to grow 1–2% in FY20F amidst closures of nonperforming stores. We maintain our revenue growth forecast of 2.4% YoY in FY20F.
3. 1QFY20 revenue contribution from Cambodia improved to circa 3% (2% in 1QFY19) while that from Thailand was at 1% (0% in 1QFY19). The group currently has 3 stores in Cambodia and 7 stores in Thailand. The group plans to open a fourth store in Cambodia in 2QFY20. However, as these stores are still in their gestational period, these operations are expected to remain a drag on the group’s profitability in FY20F.
4. The adoption of the MFRS 16 has resulted in a RM24.6mil increase in depreciation and RM6.1mil increase in finance cost in 1QFY20. However, rental expense of RM26.0mil was excluded. Net negative impact to the group’s profitability was around RM4.8mil. This is in line with our depreciation and finance cost forecasts for FY20F of circa RM103.1mil and RM26.2mil respectively.

• Padini’s prospects are unexciting due to cautious consumer spending amidst a subdued economic outlook, low wage growth, coupled with its inability to fully pass on the Sales and Services Tax (SST) (effective 1 Sep 2018) to end users. Not helping either, is the saturation in the local fast-fashion industry, coupled with the onslaught of online fashion retailers. An added risk could come from the MYR’s weakness against the CNY, resulting higher cost of apparel imports from China (of which the players, Padini included, are again unable to pass on to end users due to the lack of pricing power).

Source: AmInvest Research - 5 Dec 2019