-  We reaffirm our HOLD recommendation on Padini Holdings, with a lower fair value of RM1.80/share (vs. RM1.95/share previously), based on our DCF-derived valuation. -  We arrive at the revised fair value to account for the uncertainties over consumer spending resulting from the possible implementation of GST and subsidy rationalisation.

-  Padini finished the year with a decent set of results that came in line with our and consensus’ expectations. FY13 earnings came in at RM85mil (10% lower compared to FY12).

-  This is in line with our cautious view on Padini’s slowing FY13 earnings momentum, given the shift in consumer shopping pattern and rising competition.

-  We understand from management that FY13’s same-storesales-growth (SSSG) for Concept Store was only 0.9% while Brands Outlet grew by 1%. Padini’s gross profit margin came in at 47% (vs. 48% in FY12).

-  Nevertheless, 4QFY13 revenue and earnings fell by 13% and 38% QoQ respectively due to the seasonally weak quarter with the absence of major festivals. In addition, consumer spending was further muted due to the general election.

-  For this fiscal year, Padini is back on its “store expansion mode” to drive earnings further. There are five new stores in the pipeline (mixture of Concept Stores and Brands Outlets) to be opened in Langkawi, Miri and Seremban by 1HFY14F (vs. only 1 store in FY13). This is in addition to two new stores that were recently opened in Gurney Paragon.

-  Amidst its expansion plans, we maintain our cautious view on Padini as margins are likely to be squeezed further. We project gross profit margin at 46% in view of the competitive retail landscape and the group’s intention to increase bundling of promotions.

-  All in all, we forecast FY14F earnings to grow by 9% to RM93mil, supported by new store openings, and by another 10% to RM102.5mil in FY15F. FY16F’s earnings are estimated at RM113mil.

-  FY13’s dividends amounted to 8 sen, translating into yields of 4.7%. We are expecting dividends of 10 sen (25% YoY increase) for FY14F, which is at an attractive 6% yield currently. As a start, Padini has declared a 2.5 sen dividend for FY14F.

-  At the current level, Padini is trading at 12x FY14F’s PE, slightly above its 5 year historical mean of 10x.

Source: AmeSecurities