Investment Highlights

• We maintain our BUY recommendation as we raise our fair value to RM3.60/share (vs. RM3.18 previously). Our fair value is derived from a higher PE multiple of 15x pegged to CY18 EPS. We believe Padini deserves to trade at a premium to its 5-year mean valuations due to its increasingly reliable execution, sustained growth and robust balance sheet.

• Padini’s reported 3QFY17 earnings of RM34.8mil (YoY: - 0.9%) brought 9MFY17 earnings to RM117.9mil (YoY: +18%). It is in line with ours but ahead of consensus, at 76% and 79% of estimates respectively.

• An interim and special dividend, amounting to 4.0 sen/share was announced. In view of its record-breaking performance, the group declared an additional special dividend of 1.5 sen/share. YTD DPS amounting to 9.0 was as expected.

• We were pleasantly surprised by Padini’s SSSG in the region of an estimated mid-single-digit percentage growth. It is no small feat given it is off a high FY16 base. Combined with an expected c:15% or 13 more stores, it drove 9.2% YoY revenue growth for the quarter. Meanwhile, cumulative SSSG sustained above 10%.

• Its flat YoY bottom line can be primarily attributed to marginally higher marketing costs and finance costs. PBT margin dipped by 1.1ppts. However, on a cumulative basis, YoY margins were comparable, indicating that costs have been relatively stable.

• We are highly encouraged by Padini’s resilient branding and constant innovation to consistently grow store sales. It is reflective of management’s purposeful execution. It lends confidence to management's plans to expand Padini regionally. We wait for further details of the regional venture.

• We maintain our forecasts as earnings were within expectation. Key risk includes an indirect exposure to the strengthening of RMB vs. MYR. By our estimates, a -1% change in RMB/MYR would result in a -2.3% impact to our earnings forecast (see Exhibit 2).

• We have assumed a MYR/RMB exchange rate of 1.56/1.58/1.59 for FY17F-FY19F. Other risks include increased competition from other fashion apparel retailers and fewer-than-expected additions of stores going forward.

Source: AmInvest Research - 31 May 2017