Investment Highlights

• We maintain our HOLD call on Padini Holdings (Padini) with a higher fair value of RM2.87 (previously RM2.36/share). Our fair value for Padini is based on a PE of 13x FY22F EPS.

• Padini’s 1Q21 core net profit of RM20.7mil (+6% YoY) slightly exceeded expectations as it made up 19% of ours and consensus estimates. In FY19, 1Q19 made up 11% of its full-year profit. While 1QFY20 made up 26% of FY20 profit, this comparison does not serve as a good benchmark as the Covid-19 pandemic disrupted Padini’s operations especially during 2HFY20.

• Hence, we increase our earnings forecasts by 8%, 22% and 20% for FY21F, FY22F and FY23F respectively. This is to account for better-than-expected sales going forward and that typically, Padini’s 1Q is the weakest performing quarter.

• Padini posted a 1QFY21 revenue of RM311mil (+78% QoQ, -8% YoY). The revenue was higher QoQ in 1QFY21 due to the period coinciding largely with the recovery MCO (RMCO), where business operations were allowed to operate as compared to during the MCO where Padini stores were shut as it was considered a non-essential service. On a YoY basis, sales were 8% lower in 1QFY21 due to the adverse impact from the Covid-19 pandemic.

• 1QFY21 gross profit margin was 38% (-3ppt YoY; +8% QoQ). This is mainly due to a lower selling price as compared to the previous year as sales continued to struggle during the pandemic.

• Padini’s 1QFY21 PBT was up at RM28.2mil, a 5% increase YoY. We are impressed as despite the decline in revenue, the PBT increase was due to Padini’s cost-cutting measures during the pandemic. This bodes well for the future profitability of the company.

• During the pandemic, Padini undertook cost control measures, especially in regards to staff costs. Also, Padini received rental rebates during the quarter which drove down costs slightly.

• We believe sales will pick up in the subsequent quarters due to seasonality factors, with the Christmas season and year-end school holidays boosting local sales.

• However, we remain cautious moving into 2QFY21 due to the reinstatement of the conditional MCO (CMCO) that will reduce footfall. A lack of tourists during the holiday season will also dampen earnings as tourist customers make up roughly 30–50% of sales in tourist-centric stores in KL (such as Pavilion, KLCC and Fahrenheit 88 Mall).

• We are positive on management’s continued efforts to implement measures to control costs and streamline its operations (as seen in increased PBT) and the group’s ability to withstand the impact of the pandemic due to its strong balance sheet and low borrowings. However, Padini’s long-term prospects will be challenging due to the heightened competition in the fast-fashion industry

Source: AmInvest Research - 30 Nov 2020