Investment Highlights

• We maintain our HOLD call on Padini Holdings (Padini) with an unchanged fair value of RM3.09/share with no adjustment for ESG rating based on a 3-star rating as appraised by us (Exhibit 3). Our fair value for Padini is based on a PE of 14x FY22F EPS.

• Padini hosted a results briefing yesterday and here are the key takeaways:

1. In terms of revenue composition, Padini saw its sales from its overseas businesses improve to 3.6% of revenue in 1HFY21 from 3.2% in 1HFY20. This was mainly due to positive contribution from its four stores in Cambodia. The group’s Thailand operations are still making losses.
    
2. E-commerce sales for the same period contributed 0.8% of total revenue in 1HFY21, vs 0.3% in the same period last year. While we view this as a step in the right direction, the contribution is still small, and Padini is still tweaking its strategy through social media channels to further boost sales.
    
3. We understand that there were bottlenecks in the system when online orders spiked in the run-up to Chinese New Year, resulting in certain orders being shipped out late. Sales from outlets still contribute the bulk, at about 93.5% of revenue.
    
4. In 2QFY21, Padini closed four stores in total – two Brand Outlet (BO) stores (Damen Mall, Gateway KLIA 2), one free-standing Vincci store (FSS; First World Plaza) and one Padini Concept Store (PCS; Gateway KLIA 2).
    
5. As at end-2QFY21, Padini has 121 stores consisting of: BO at 49 stores; PCS at 47 stores; and FSS at 25 stores. In 2QFY21, most store closures are in areas with typically high tourist footfalls (Genting & KLIA).
    
6. With the weak sales in a historically strong quarter, Padini recorded an SSSG of -51% in 2QFY21 versus the same period in the preceding year. With its low sales, we believe that there will be an inventory writedown for clothing with CNY-specific designs.
    
7. Similar to 1QFY21, no dividends were announced and Padini prefers to preserve cash and bank balances and wait for an improvement in economic and business conditions before committing to a dividend payout. As such, we do not expect any dividend in 3QFY21. We anticipate 3QFY21 to be impacted by the MCO 2.0 and sales to remain weak. No dividend guidance was given for FY21F.
    
8. In the medium to long term, Padini is looking to improve and enhance its e-commerce channels as it considers these complementary and not substitutes to its outlets. E-commerce would also provide an omni-channel experience for its customers. In expanding into other geographical areas, Padini believes it needs to establish an online and physical store at the same time and hence Padini is strengthening its e-commerce channels in Malaysia first. Locally, Padini sees the market consolidation as a potential acquisitive opportunity as the other retailers do not have the luxury of a strong net cash position to weather the storm of the pandemic.

• Moving forward, we believe that Padini is well-positioned to reap the benefits of a cyclical recovery with an expected increase in consumer spending in 2021F. Padini’s low price point and value-for-money product offerings appeal to the mass market, which will underpin the group’s recovery as it navigates through a challenging business environment.

Source: AmInvest Research - 4 Mar 2021