Investment Highlights

• Despite earnings falling in line, sales are levelling off at a high base for Padini after 2 blockbuster years of growth. We downgrade our recommendation to SELL from HOLD with our unchanged fair value of RM4.52/share. We believe valuations trading at 17.8x or +2SD to its historical trading have ran well ahead of its growth outlook against a backdrop of an increasingly saturated domestic market. Our fair value if based on a PE 15x peg.

• Padini posted 2QFY18 earnings of RM50.0mil (QoQ: 60%; YoY: -8.3%) bringing the 1HFY18 earnings to RM81.2mil (YoY: -2.3%). This was off store-driven revenue growth of 7.9% YoY for the quarter. We deem the results to be within our and consensus expectations at 45% and 44% of estimates.

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

• Revenue for the quarter grew 7.9% against higher store core count as SSSG is believed to be flattish. Specifically, Vincci and Brands Outlet were the engines of A&P-fuelled growth while the other brands saw brisk sales. While sales are growing, it appears to be tapering off at a high base and possibly enhanced competition (Exhibit 2 & 3).

• Gross profit margins deteriorated by 260 basis points to 39.2% in 2QFY18 from 41.8% (2QFY17). We believe this was due to more aggressive bundling and pricing strategies to stem creeping competition as the RMB/MYR has remained largely favourable to Padini over the quarter.

• Meanwhile, A&P-driven sales at Brands Outlet and Vincci diluted margins. It ultimately sacrificed earnings growth as the brands saw tepid growth of 2.9% and -26.6% YoY respectively for the quarter.

• Padini’s store expansion is well on track, having expanded 10 stores thus far for FY18F. Meanwhile potential rationalisation of underperforming stores may cushion margins going forward. However, we think it is unlikely as Padini has rationalised most of its consignment counters over the years, with some 56 left (vs FY14: 167).

• In view of the earnings falling in line, we maintain our forecast assumptions. Key risks include favourable RMB/MYR exchange rate and acceleration in store expansion.

Source: AmInvest Research - 27 Feb 2018