Investment Highlights

• We downgrade Padini to SELL from HOLD recommendation as we maintain our fair value of RM4.52/share. We opine that lofty valuations have well overpriced Padini which has benefitted from better consumer spending. Our fair value is derived from a higher PE multiple of 15x pegged to FY19 EPS.

• We believe Padini could see uptrading as consumer spending takes a turn. Meanwhile, the decent growth off a high base appears undeserving of existing lofty valuations. It is trading above its +2SD of its historical PE mean.

• Padini’s 3QFY18 earnings of RM39.8mil (YoY: 14.3%) brought 9MFY18 earnings to RM121.0mil (YoY: +2.6%). It is in line with ours and consensus, at 68% and 66% of estimates respectively.

• An interim and special dividend, amounting to 4.0 sen/share was announced as expected. YTD DPS amounts to 9.0.

• Revenue for the quarter grew a robust 13.8% YoY. It was aided by favourable seasonal spending relative to the previous corresponding quarter and an enlarged store base (10%) or 13 new stores. Principal brands, Brands Outlet (21%) and Padini (17%) spearheaded sales, while it was partially offset by Vincci contracting (-4%).

• YTD, Padini has expanded 12 free standing stores, bringing its free standing store count of 138 stores. It is well on track to exceed previous FY store expansions of FY16 and FY17 of 14 each. Meanwhile, Padini is poised to complement its existing flagship store with 2 additional stores in Cambodia by end-FY18F.

• Padini 5-year goal is for export to eventually contribute 10% of total revenue mix. We gather that the prospective market is unlikely to be more mature and established customer bases such as Thailand or Indonesia. It leaves remaining possibilities such as Myanmar, Laos and Vietnam. We are encouraged by the calculated and measured approach to supplement growth over the long run. However, export contributions are likely to be insignificant in the nearer term.

• YTD gross and PAT margins were relatively stable. The MYR/RMB exchange rate while unchanged YoY, has a neutral impact to margins as Padini employs cost-profit sharing with its suppliers.

• Going forward, margins outlook appears unknown given the uncertainty over the quantum of SST tax being imposed. However, the transitional period of GST being zero-rated could prove beneficial to Padini as the fashion retailer had been absorbing GST all this while.

• We leave our forecasts unchanged as earnings are in line with our expectation. Risks include increased competition from other fashion apparel retailers and fewer-than-expected addition of stores going forward.

Source: AmInvest Research - 24 May 2018