- We reiterate BUY on Padini Holdings with a higher fair value of RM2.10/share (from RM1.80/share) following its betterthan- expected 1QFY16 results. Our valuation is based on an unchanged FY16F PE of 13x.

- Padini kicked off its FY16 with a strong 1Q net profit of RM32mil. The results were well ahead of our and consensus expectations, accounting for 35% and 34% of the respective full-year forecasts.

- The positive variance from our earlier projections can be mainly attributed to the sharp improvement in its EBIT margin (QoQ: +7ppts; YoY: +5ppts), as its revenue of RM270mil had met 25% of our and market’s estimates.

- In view of this, we have revised upwards our FY16F-FY18F earnings forecasts by 17%-19% as we raise our EBIT margin by 2ppts to 13%.

- As expected, the group also declared its second interim dividend of 2.5 sen/share to bring the total dividend declared thus far for FY16F to 5 sen/share. At the current price, our gross dividend forecast of 10 sen/share for FY16F translates to an attractive yield of 6.3%. This should help cushion any downside to its share price.

- The rebound in Padini’s 1QFY16 earnings compared to 1QFY15’s (YoY: +65%) was mainly due to the strong performance and new store openings for its Padini Concept Stores and Brands Outlet Stores. These two brands collectively contribute 82% to revenue and 67% to PBT.

- While Brands Outlets has been doing well (FY15 SSSG: +9%) given its strong position in the value-for-money segment, Padini Concept Stores’ robust 23% SSSG in 1QFY16 (FY15: +9%) was a welcome surprise. This follows management’s decision to change its pricing policies and merchandising strategies. Note that the mark-up and hence gross margins at Padini Concept Stores are higher than that of Brands Outlet.

- The 75% jump in Padini’s sequential earnings was due to seasonality, as the Hari Raya festive season was in 1QFY16.

- Looking ahead, we expect earnings to moderate slightly in 2QFY16 as the higher costs from the weak RM flow through. The group does not intend to raise prices given the backdrop of weak consumer sentiment and anti-profiteering regulations post-GST. Earnings are, however, expected to be stronger in 2H in view of the festive seasons (e.g. 3Q: Chinese New Year; 4Q: Hari Raya).

- Padini’s valuations are undemanding at current price. It is trading at FY16F-FY18F PEs of only 7x-10x, below its 5-year historical mean of 13x. Maintain BUY.

Source: AmeSecurities Research - 27 Nov 2015