- We reaffirm our BUY recommendation on Padini Holdings with a higher fair value of RM1.80/share (vs. RM1.70/share previously), pegged to an unchanged PE multiple of 13x FY16F earnings. This is following its FY15 results, which outperformed our estimate by 23%, as EBIT margin contraction were not as severe as we had earlier anticipated.

- Padini posted 4QFY15 net profit of RM18mil (QoQ: -32%; YoY: +33%), bringing its headline FY15 earnings to RM80mil (YoY: -12%); it was driven by a strong topline growth of 13% YoY, which were also helped by the earlier arrival of Hari Raya. This is despite challenges in the industry, namely the slowdown in consumption spend arising from the GST implementation in April 2015.

- A gross interim dividend of 2.5sen/share for 1QFY16 was declared.

- Padini earnings were lower on a YoY basis following the decline in gross profit margin by 3ppts mainly due to heavy discounting and GST cost absorption during the year.

- Nonetheless, we expect earnings to rebound in FY16F in view of our expectations of improving SSSG and gross margin outlook. This is underpinned by progressive selling price adjustments to be implemented in October onwards, expectations of a short-lived weak consumption spend, and a low base effect. Its ramp-up of new stores should also be supportive of earnings growth.

- FY16F earnings are projected to grow by 13% to RM91mil, and by another 13% to RM102mil in FY17F. We introduce FY18F earnings at RM117mil. Padini will continue to emphasis its high-growth Brands Outlet brand, as it continues to do well (43% of FY15’s PBT) given its strong position in the value-for-money market

- The company opened 10 new stores in FY15 with 16 new stores in the pipeline for FY16F. We expect start-up costs to remain well contained.

- Padini’s business is highly cash generative with net cash position of RM98mil as at end-FY15. Dividend yield remains attractive at 7.4%, backed by the company’s commitment of 10sen/share dividend per annum.

- The stock remains a BUY, backed by:- (1) a strong footing and wide distribution network, which is well position to capture the recovery of consumer spending patterns; (2) compelling valuation at 10x PE of FY16F, which is below its 5-year historical mean of 13x; and (3) attractive dividend yield, which provides downside risk to share price.

Source: AmeSecurities Research - 19 Aug 2015