Investment Highlights

• We maintain our BUY call on Padini Holdings (Padini) with a higher fair value of RM3.15/share (from RM2.93/ share). Our fair value for Padini is based on a PE of 13x CY21F EPS (rolled over from FY21F EPS). Our PE multiple is based on Padini’s average historical forward PE multiple.

• Padini’s 9MFY20 core net profit of RM90.5mil (-15% YoY) accounted for 84% of our and 70% of street’s full-year earnings forecasts respectively. We deem this as largely in line with our expectations as we anticipate a subdued performance in 4QFY20 due to the full-blown impact of Covid-19 on retail shopping.

• We anticipate the adverse impact from the Covid-19 pandemic to be larger in 4QFY20 due to the extended MCO affecting most of the quarter from 1 April to 9 June 2020. However, the group plans to control costs, preserve cash, streamline operations and optimize working capital which should slightly lessen the negative impact. We also expect recovery to come in gradually in FY21F and FY22F postcontainment of Covid-19 pandemic.

• Padini’s 3QFY20 revenue tumbled 27% YoY to RM347.3mil (-30% QoQ). This is despite the Chinese New Year festive season, which would normally drive the group’s sales in 3Q. The group was adversely impacted by the Covid-19 outbreak as well as the enforcement of the movement control order (MCO) from 18 March to 31 March 2020.

• 3QFY20 gross margin grew 5ppt to 42.7% (+3ppt QoQ). We believe this was due to Padini’s cost control measures and cheaper raw materials from China due to the pandemic.

• 3QFY20 PBT dropped 50% YoY to RM24.1mil (-68% QoQ) while PBT Margin fell 3ppt YoY to 6.9% (-8ppt QoQ). This was due to the lower sales during the MCO. The QoQ drop was also partly due to the bonus payout in 3QFY20.

• 9MFY20’s topline fell 7% YoY to RM1,181mil (vs. RM1,267mil previously). The sharp drop in footfall at stores in 3Q had resulted in a plunge in sales that erased the cumulative revenue gain for the group (revenue grew 5% YoY in 1HFY20) due to the Covid-19 pandemic.

• 9MFY20 PBT slid 14% to RM126.2mil while PBT margin fell 1ppt to 11%. The pressure on margin from lower sales during the outbreak was slightly alleviated by cheaper raw material as gross margin grew 2ppt YoY to 41%.

• Padini’s effective tax rate slipped 0.5ppt to 27% as the group utilized deferred tax assets amounting to RM4.4mil in 9MFY20. The effective tax rate is slightly high due to some non-deductible expenses.

Source: AmInvest Research - 28 May 2020