- We re-affirm our HOLD recommendation on Padini Holdings, with a higher fair value of RM1.95/share vs. RM1.71/share previously, based on our FY14F DCF valuation, following 3QFY13’s better-than-expected sales and gross profit margin.

- 3QFY13 reported net profit of RM25mil, taking 9MFY13 earnings to RM70mil. As expected, a third interim dividend of 2.00sen/share was declared during the quarter under review, bringing DPS to 6sen/share, to-date.

- Given that 9MFY13 earnings were above our expectations and constituting 77% of consensus estimates, our EPS numbers for FY13F-FY15F had been revised upwards by 14%. This is solely premised on a slightly more optimistic gross profit margin of 47% vs. 45% previously, given ongoing efforts to expand the variety of mark-down merchandise. At the same time, we maintain our same-store-sales growth assumption of FY13F: 0%, FY14F: 5% and FY15F: 8% vs. FY12’s 14%.

- 9MFY13 earnings dipped 13% YoY while revenue inched up 10% YoY, notwithstanding a decline in exports revenue. Gross profit came in lower by 6bps to 47% YoY, which were partly caused by rising operating expenses of new stores opening in FY12 and in view of price competition.

- The Chinese New Year festive season and contributions from new stores had surprisingly sustained sales to similar levels in 2QFY13, with just a marginal 2% QoQ decline in revenue. This positively follows the emergence of an improved gross profit margin by 6bps QoQ to 49%.

- In contrary, a slow seasonal 4QFY13F is anticipated. We foresee a pick-up up in FY14F earnings, off FY13F’s low base, underpinned by an improved retail sales sentiment postgeneral election. FY12 experienced a phenomenal 26% earnings growth.

- The main focus for Padini going forward is to improve gross profit margin via mark-down strategies to drive sales given the competitive pricing pressure, and to continue looking out for good store locations. Store expansion is nevertheless ramping up in FY14F with a pipeline of 6 new stores (3 Concept Store, 3 Brands Outlet) vs. FY13’s one new store only.

- On the flipside, Brands Outlet’s potential is a good support for value-for-money proposition, following consumers’ shift in spending pattern.

- Balance sheet is healthy at end-9MFY13 with RM166mil net cash. Padini is a dividend player – supported by increased dividend yields of >4% in FY14F onwards as guided (DPS +2sen/share or +25%).

- Valuations wise, the stock is trading at 15x FY14F’s PE, on parity to 5-year historical mean. Bonia Corporation, its closest competitor, is trading at single digit consensus’ PE of 9x.

Source: AmeSecurities