- We re-affirm our HOLD recommendation on Padini Holdings, with an unchanged fair value RM1.71/share, based on our DCF valuation as we roll forward our base year to FY14F (June).

- We have again trimmed our FY13F-FY15F earnings, by 16%-21% to reflect:- (1) Lower same-store-sales growth (SSSG) for FY13F: 0%, FY14F: 5%, FY15F: 8% vs. FY12’s 14%; and (2) Compression in gross profit margin to 45%.

- Earnings momentum in the near term is expected to weaken, off its large base in FY12. This is predominantly due to the softening of retail spend and price competition. The 3Q result is scheduled for release at the end of May.

- The cautious consumer sentiment ahead of the elections had partly dampened 1HFY13 SSSG, which contracted by 8.8%. We believe the contraction in SSSG has yet to bottom. SSSG is envisaged to recover in FY14F, underpinned by an improved retail sales sentiment, post the general election in 2HCY13.

- More importantly, a shift in consumer shopping pattern towards value-for-money or discounted merchandise, had negatively impacted margins. Gross profit margin compressed to 46% in 1HFY13 from 1HFY12’s 49%, dragged by heavy promotion and discounting activities.

- Coupled with the recent influx of international brands, the latest addition being H&M, price competition had further intensified. Amid the backdrop of a challenging retailers’ outlook, on-going initiatives to expand the variety of mark-up merchandises are now part of Padini’s strategy to drive sales.

- On the flipside, Brands Outlet provides a good support to consumers’ shift in spending pattern. In-line with the group’s focus to penetrate into the middle- to lower-end market through Brands Outlet, expansion will continue with three outlets indentified for FY14F.

- Looking ahead, store expansion resumes in FY14F with six in the pipeline (3 Concept Store, 3 Brands Outlet) for Miri, Penang and Seremban. Store refurbishments are the focus in FY13, with only one store opening due to scarcity of floor space in existing malls.

- Padini remains as a yield play of >4%, despite its earnings risks, which have been priced-in by the market, in our view. Dividends are expected to go up by 2 sen (+25%) to 10 sen in FY14F vs. FY13F’s 8 sen. This is supported by a steady cash buffer of RM187mil and a healthy balance sheet.

- The stock is currently trading at 16x PE for FY14F, slightly above its historical 5-year peak of 15x. Its closest competitor, Bonia Corporation Bhd (Bon Mk Equity, Non-rated) is trading at 8x PE.

Source: AmeSecurities