Investment Highlights

• Padini continues to scale record earnings backed by a pipeline of medium term growth. However we downgrade our recommendation to HOLD (from BUY) as valuations are fairly reflective of Padini’s prospects. We raise our fair value to RM4.20/share (vs. RM3.60 previously), a PE multiple of 15x pegged to CY18 EPS. Despite its robust balance sheet to support its regional expansion, the incremental growth falls beyond our valuation period.

• Padini’s 4QFY17 earnings of RM39.5mil (YoY: +5.7%) brought FY17 earnings to RM157.4mil (YoY: +14.6%). It is in line with ours and consensus, at 101% and 100% of estimates respectively.

• An interim dividend, amounting to 2.5 sen/share was announced. YTD DPS amounting to 11.5 was as expected. It represents a payout close to 50%.

• The fashion retailer posted a blended SSSG of 8% for FY17. Meanwhile, there were 14 new stores representing an enlarged store base of 12% for FY17. These two factors propelled topline to grow 20.7% YoY.

• The company’s stable of brands were highly successful over the FY16-FY17 with its bundling promotions, offering deep underlying value to its customers. We expect SSSG to normalise going forward as in-store sales are increasingly saturated. Hence, we believe that Padini would be more reliant on store expansion to drive growth.

• FY17 gross margins deteriorated by 2.3 ppts by what we estimate to be largely off higher input cost apart from discounting efforts. Recall while it conducts most of its purchases in MYR, it is ultimately sourced from China. By our estimates, a -1% change in RMB/MYR would result in a - 2.3% impact to our earnings forecast. We have a RMB1.58/MYR forecast for FY18.

• Meanwhile, EBIT margins compressed by 0.8 ppts for the year. This is despite recognizing MYR22mil in inventory write down arising from more stringent inventory policy adopted by Padini in 4QFY17. Adjusting for the writedown, margins would have improved by 0.6 ppts. It is noteworthy given Padini sales growth against a relatively high operating leverage resulted in offsetting its gross margin dilution. It resulted in earnings growing a respectable 14.6% YoY.

• The recent incorporation of a subsidiary in Cambodia on 7 Aug comes to no surprise as Padini has been previously touted for a regional expansion. While it provides an exciting avenue of growth, the nascent entrance into an emerging market may only contribute significantly in the medium term.

• We maintain our forecasts as earnings were within expectation. Key risk includes an indirect exposure to the strengthening of RMB vs. MYR and a slowdown in store expansion.

Source: AmInvest Research - 28 Aug 2017