Investment Highlights

• Padini posted a healthy first quarter with encouraging sales amid unfavourable festivity timing-related spending. We maintain our HOLD recommendation as we lift our fair value to RM4.52/share (vs. RM4.20 previously). Our fair value is based on a PE 15x peg, with valuations rolled over to FY19 EPS.

• We like Padini for its: 1) strong brand value; 2) execution; and 3) value-for-money fast fashion positioning. However, the stock is trading well above its +1.0 SD forward PE of 14x, which overprices Padini’s entry into Cambodia in our opinion.

• Padini clocked sturdy 1QFY18 earnings of RM31.2mil (QoQ: -20.9%; YoY: 9.1%) against a revenue base of RM315.2mil (QoQ: -31.6%; YoY 1.7%). Overall, earnings were above our estimates but in line with consensus, at 19% and 17% forecasts respectively.

• An interim dividend of 2.5 sen//share was also announced as expected (vs. 2.5 sen/share previously).

• Marginally higher YoY revenues of 1.7% were driven by new store openings against flattish SSSG by our estimates. We opine sales were relatively resilient considering the quarter experienced unfavourable Hari Raya timing against the corresponding period.

• Gross profit margins improved by 120 basis points to 42.7% from 41.5%. The unfavourable timing of Hari Raya may have furnished the quarter with better margins given possibly less intensive A&P promotional exercises. The further strengthening of the MYR could benefit Padini as the fashion apparel retailer sources c:95% of its inputs from China. Despite its intention to shift 25% of product sourcing from China to Malaysia domestically, Padini remains a beneficiary of a strengthening MYR against the RMB.

• We think its regional expansion to Cambodia is long-term positive. However, initial contributions are unlikely to be insignificant given it is likely weighed by start-up cost and a gestation period tied to aspirational regional fashion brands exploring into new markets.

• In view of the positive 1QFY18 results, we elevate our SSSG assumption. Our FY17-18F earnings are lifted by 7%/2%/3% respectively. Key risks include uptrading from Padini by customers with improved discretionary spending, heightened competition from other fashion apparel retailers, and a slowdown in store expansion.

Source: AmInvest Research - 30 Nov 2017