Investment Highlights

• We maintain our HOLD call on Padini Holdings (Padini) with an unchanged fair value of RM3.18/share. We base our fair value on a PER of 16x CY22F EPS. We make no ESG-related adjustment for our rating of 3 stars.

• We expect Padini’s streak of poor earnings to continue throughout CY21F as the group is heavily dependent on brick-and-mortar outlets that will be severely affected by MCO 3.0. Overseas outlets face risk of closures, with rising cases in countries of operation. Nonetheless, a strong recovery is expected in CY22F, as pent-up demand is expected to drive footfall and ticket size.

• Here are some key takeaways from the results briefing yesterday:

1. We expect further store closures within the year as Padini struggles to manage its performance during MCO 3.0. With heavy exposure to outlet sales (comprising ~93.2% of 9MFY21’s total sales), further store closures are likely to result in revenue compression.

2. We are unexcited over Padini’s underwhelming online presence. We feel that its sizeable online ticket size of RM50–80 and its fast fashion offerings make it more suited for omni-channel distribution. E-commerce sales contribution in 9MFY21 widened to 1.2% from 0.3% in the same period last year.

3. Padini is taking time in developing its website and mobile app, the latter of which is scheduled for release this year. Roughly 80% of e-commerce sales are through its own distribution channels, while the remainder is sold via Shopee and Lazada.

4. We expect poor SSSG to continue, with 3QFY21 reporting a 25% decline YoY. This is despite a weak base, with the same period last year having undergone a fall of 26% YoY. Alongside mobility restrictions and poor sales mix, performance was marred by the group’s overestimation of its CNY sales, being eventually forced to clear out its inventory. Padini had similarly overestimated its sales for the Hari Raya promotions this year. This year’s Raya performance was worse than the last due to tighter movement controls.

6. We expect Padini’s overseas operations to perform weaker in the following quarters as Covid-19 cases in Thailand and Cambodia are surging. The group’s Thai operations are still making losses. Its Phuket outlet has been closed since March. In Cambodia, three out of four stores were closed since April. Sales from overseas units make up 3.4% of its total revenue stream in 9MFY21 vs. 3.1% in the same period last year.

7. Although Padini has announced a surprise dividend of 2.5 sen for the quarter, we do not expect another one in the following quarter as the group may need to conserve cash for working capital requirements.

Source: AmInvest Research - 2 Jun 2021