- We reaffirm our HOLD recommendation on Padini Holdings with an unchanged fair value of RM1.80/share, pegged to FY15F earnings at 12x PE – one standard deviation above its 5-year historical mean PE.

- Padini’s FY14 results were in line with our (98%) and consensus (96%) estimates. The group reported 4QFY14 core earnings of RM14mil, and ended FY14 core earnings at RM91mil.

- Dividends declared for FY14 amounted to 11.5sen (including a special dividend), which implies a dividend yield of 6.1%. Padini declared a first-interim dividend of 2.5sen for FY15.

- Net profit grew 7% YoY on the back of revenue growth of 10%, underpinned by stronger sales on existing and new stores; it opened five Padini Concept Stores and seven Brands Outlet stores during the year. Gross margins on a full-year basis softened by 1ppt to 46% due to more promotional activities held to boost topline sales.

- As expected, earnings and revenue declined on a quarterly basis due to the seasonally weak 4Q. This is mainly caused by the absence of festive seasons.

- Interestingly, Brands Outlet’s foothold had clearly strengthened within the domestic market given its aggressive expansion and brand building phase in recent years. Its contribution has grown considerably to 30% of revenue in FY14 from just 12% in FY10.

- While Padini brand is still the biggest revenue driver at 32%, its PBT margin had decelerated to 16% from 23% in FY11. We believe this is on the back of promotional activities.

- Therefore, on a PBT basis for FY14, Brands Outlet’s contribution had outstripped the Padini brand, accounting for 38% vs. the latter’s 37%; this is underpinned by sustained PBT margins within the 17% range and consumer preference for value-for-money products.

- Padini’s expansion plan remains with a solid pipeline of new stores – four Concept Stores and four Brands Outlets to be opened during this financial year.

- Post-results adjustments, we now project FY15F earnings at RM98mil, followed by RM102mil in FY16F and RM118mil in FY17F. Consumer spend is likely to remain soft in FY15F underpinned by higher cost of living. Consumer spend is expected to spike up prior to the implementation of GST and will remain subdued thereafter. We expect consumer spend to normalise in FY17F once GST is fully digested upon.

- The stock is currently trading at 13x PE, above its 5-year historical mean trend of 9x.

Source: Kenanga