Investment Highlights

• We downgrade our call on Padini Holdings (Padini) to HOLD from BUY with a lower fair value of RM2.36 (previously RM3.02/share). Our fair value for Padini is based on a PE of 13x FY22F EPS.

• Padini’s FY20 core net profit of RM74.4mil (-54% YoY) missed expectations and fell short of our full-year earnings estimates (78% of our and 72% of consensus). This was due to the Covid-19 impact where no sales were generated during the movement control order (MCO) period from 18 March–4 May 2020.

• We cut our earnings forecasts by 14% for FY21F and 17% for FY22F. We introduce our earnings forecasts for FY23F of RM126mil.

• Padini’s 4QFY20 revenue was lower at RM174mil (-66% YoY; -50% QoQ). The revenue was lower as a result of zero sales generated due to the implementation of the MCO because business operations were restricted at the time.

• 4QFY20 gross margin fell to 31% (-8ppt YoY; -12ppt QoQ). We think that this is because Padini was not able to reach economies of scale with lower sales volume.

• 4QFY20 PBT sank to a RM19mil loss as a result lower revenue generated. The drop was also attributed to the impact of MFRS16. Excluding the MFRS 16 impact of roughly RM4mil, loss before tax would have been lower at around RM15mil.

• Padini’s FY20 revenue was lower at RM1,355mil (-24% YoY). FY20 gross margin inched up 0.5ppt to 40%. We think that this is due to Padini’s cost control measures and cheaper raw material from China due to the pandemic.

• FY20 PBT slipped to RM107mil (-51% YoY). The drop was partly attributed to the impact of MFRS16. Excluding the MFRS 16 impact of roughly RM17mil, PBT would have been around RM124mil (-43% YoY).

• We believe sales will improve in subsequent quarters following the ease of restrictions. However, we believe Padini’s long-term prospects will be challenging due to unexciting domestic outlook and saturation in the fastfashion industry

Source: AmInvest Research - 27 Aug 2020