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

- Padini reported 1HFY14 net profit growth of 26% YoY to RM56mil, underpinned by stronger performance at Brands Outlet.

- As expected, dividend of 2.5sen/share was declared, bring dividends declared to-date to 5.0sen/share.

- While the 1HFY14 results constitute 60% of ours and consensus estimates, the results is deemed in line with expectations. This is because 1H is seasonally stronger due to higher shopping activities during year-end festive seasons.

- The group’s strategy to grow Brands Outlet to cater for the shift in consumer preference for value-for-money products is gaining traction.

- As of 1HFY14, Brands Outlet contributed 28% to revenue vs. FY13’s 25% and FY12’s 21%. Nevertheless, the Padini brand continued to command the bulk of revenue at 32% as at 1HFY14.

- Gross profit margin improved to 47% from 46% in 1HFY13.

- We expect full-year FY14F numbers to come in at similar levels with FY12’s RM96mil, but at the expense of lower gross profit margins underpinned by a more challenging operating environment, i.e. higher operating costs and cost of living.

- Earnings risk to our projections is the expectations of a weaker consumer sentiment. This could, in turn, hamper Padini’s sales volumes and EBIT margins.

- For this financial year, Padini opened four stores (3 Brands Outlets and 1 Concept Store). Another five new stores are expected to come on-stream by end-FY14.

- At current level, the stock is trading at 12x PE for FY14F, above its historical 5-year PE of 11x. 

Source: AmeSecurities