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

-  Given PAD’s repositioning through its bundling strategy to boost topline sales, earnings growth is gaining momentum as witnessed by the stable gross profit margin of ~46% over FY13 and FY14, and focus on value-for-money merchandises.

-  Moving forward, PAD’s growth will be underpinned by its fast growing value-for-money segment, namely Brands Outlet (BO). We see increasing potential for BO to cater to the mass market with its resilient business model (high volume fast-selling merchandises at affordable prices) that would likely be less affected in any slowdown.

-  Given BO’s deepening market penetration through aggressive store expansion in the past eight years and encouraging sales performance, it is now the second largest revenue driver at 30%, surpassing Vincci. While Padini brands (Padini, PDI, and Padini Authentics) command the lion share of revenue at 32% in FY14, we believe that BO would outstrip the Padini brands from this financial year onwards.

-  To underscore this, BO achieved a remarkable 17% same-store-sales growth compared to Concept Store’s (CS) 4% in FY14. We believe that BO will continue to gain traction through store expansion and expansion of product line. More importantly, its value-for-money merchandises are able to leverage on a captive outskirt market, to boost sales volume.

-  We think that growth for its other in-house brands will be at a slower pace given the current challenging retail environment. Generally, CS’s higher-margin merchandise sells slower compared to BO merchandise.

-  The underlying fact is that domestic consumer demand is expected to soften further. We believe PAD would possibly embark on greater promotional efforts to drive footfall traffic and sales volume. We retain our FY15-FY17 earnings estimates. Revenue momentum is expected to be sustained by new store openings and more importantly, BO. Going forward, we expect earnings delivery in the 1Q-3Q to be at a steady growth supported by festivities, followed by a weaker 4Q on seasonal effects and GST impact. Nevertheless, we expect consumer spend to normalise in FY17 once GST is fully digested.

-  PAD has so far opened two stores at JB Komtar and will open another six stores in this financial year. FY15 will see the opening of eight new stores (4 PCS and 4 BO).

-  The stock is currently trading at a forward PE of 13x, above its 5-year historical mean trend of 11x.

Source: AmeSecurities