Investment Highlights

• We maintain our HOLD call on Padini Holdings (Padini) with a lower FV of RM3.51/share based on a lower PE of 14x as we roll over our valuation period from CY20F to FY21F. Our PE multiple is based on Padini’s average 5- year historical forward PE multiple.

• Padini’s 1HFY20 net profit of RM75.4mil (+6.0% YoY) accounted for 47.9% and 47.0% of our and street’s fullyear earnings estimate which is in line with expectations.

• We have trimmed our FY20F, FY21F and FY22F earnings forecast for Padini by around 3–4% each to reflect a softer performance due to the Covid-19 impact.

• Padini’s 1HFY20 revenue grew 5.1% YoY to RM833.2mil mainly due to contribution from four new stores that were opened in 3Q2019 and 4Q2019. We believe the group also benefitted from improved product offerings. Padini recently reshuffled its internal merchandising team to cater to its customer’s needs. PBT inched up 3.3% YoY while PBT margin was flattish at 12.2% in 1HFY20.

• In 1HFY20, 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 RM12.1mil and RM49.5mil respectively. This was more than the rental cost of RM52.3mil. Net impact to its PBT was RM9.3mil.

• Comparing 2QFY20 with 1QFY20, revenue grew 46.5% due to the Christmas season, year-end school holidays and the nationwide 5-day special sales promotion held in 4Q2019. PBT more than doubled (from RM26.9mil to RM75.2mil) QoQ while PBT margin grew 7.2ppt to 15.2%.

• Padini’s effective tax rate dropped 1.9ppt to 26.1% as the group utilized deferred tax assets amounting to RM3.7mil in 1HFY20. The effective tax rate is slightly high due to higher non-deductible expenses.

• We anticipate sales to be weak in 3QFY20 due to the Covid-19 outbreak. This will affect tourist arrivals as well as reduce patronage to retail stores.

• A prolonged Covid-19 outbreak will be largely negative for Padini as it will impact Padini’s sales and supply chain. Recall that around 60–70% of its stock are from China.

• We believe Padini’s 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.

Source: AmInvest Research - 27 Feb 2020