- We reaffirm our HOLD recommendation on Padini Holdings with an unchanged fair value of RM1.80/share, based on our DCF-derived valuation.

- Padini’s 1QFY14 net profit made up 30% of our and 29% of consensus full-year forecasts respectively, which we deem to be in line as 1H is traditionally stronger. A strong 2Q is expected - buoyed by consumer spending during the major year-end festive seasons.

- The better YoY and QoQ results were driven by increases in export sales and continuing strong performance by Brands Outlet, which in turn, was bolstered by Hari Raya and Merdeka promotions.

- We expect bundling promotions to drive earnings growth forward with Brands Outlet being the main growth driver. We are maintaining our gross profit margin assumption at 46% (vs. FY13’s 47%) in view of margin pressure arising from a notable shift in consumer preference for value-for money products.

- On the expansion front, two stores at Gurney Paragon were opened in July. Another six stores (3 Brands Outlets, 2 Concept stores and 1 Vincci store) are slated to open in the remainder of FY14F at Langkawi, Miri, Seremban and KLIA2 (should there be no further delays in the opening of KLIA2).

- While expansion prospects are more exciting (eight new stores) compared to FY13 (one new store), operating environment remains challenging due to competition.

- In fact, we are more concerned about earnings risk due to GST and subsidy cuts (i.e. rising fuel, potential electricity tariff hike) as it will be tough to pass on costs to consumers all at once via higher end-product prices.

- At this juncture, we maintain our earnings numbers and neutral stance on the stock in light of uncertainties over consumer spending and a potential slowdown in the group’s sales volume given the tightening of wallets for discretionary items.

- Padini declared second interim dividend of 2.5sen/share and special dividend of 1.5sen/share. The group has declared a total of 6.5sen/share dividends to date. At our fair value, the stock offer sustainable implied dividend yield of 5.6%.

- The stock is currently trading at 12x PE for FY14F, above its 5-year historical average of 10x.

Source: AmeSecurities