- We maintain our HOLD recommendation on Padini Holdings, with an unchanged fair value of RM1.95/share, based on our FY14F DCF valuation.

- Amidst the backdrop of a challenging retail outlook, we reaffirm our cautious view on Padini. With the continuous influx of international retailers and their expansion plans, we expect price competition to intensify with margins to be potentially dragged further.

- In particular, Swedish retailer and direct competitor, H&M, appears to be rapidly expanding its footprint in Malaysia. To-date, H&M has three stores within Klang Valley – Lot 10, Paradigm Mall and Setia City Mall.

- Similar to Uniqlo’s expansion strategy and as we have expected, H&M will make its maiden entry into Penang (first foray outside of Klang Valley) at Gurney Paragon Mall. The mall is earmarked to open on July 23. Thereafter, H&M’s upcoming fifth store will be at Avenue K, taking up three levels.

- Given Gurney Paragon Mall’s new mall status, H&M acts as a mini anchor and crowd puller for the mall. Thankfully, Padini managed to secured retail space at Gurney Paragon Mall with 2 stores in the pipeline – 1 Concept Store and 1 Brands Outlet. Note that Padini has stores in all malls that H&M and Uniqlo are also present.

- In addition to these two upcoming new stores in Gurney Paragon Mall, FY14F outlook appears more promising compared to FY13F, as another four new stores are in the pipeline in Seremban and Miri (2 Concept Stores and 2 Brands Outlets).

- Competitive pricing pressure will remain our key concern for Padini, despite store expansion resumption in FY14F. We expect FY14F earnings to pick up, from FY13F’s low base, supported by improved sales sentiment post the general election overhang.

- At current levels, the stock is trading at 14x FY14F PE, which is on parity to its 5-year historical mean.

Source: AmeSecurities