• Padini’s 1Q17 earnings of RM28.6m were inline with our full year expectation, making up 20% but slightly below consensus of 18.7%.

• Net profit decreased by 10.1% mainly due to rising costs from goods and sales events.

• Padini target to open at least 7 new outlets in FY17.

• We maintain our earnings forecast for FY17 and FY18 of RM145.2m and RM153m respectively, with target price RM2.76 based on 5 year average PER of 12.5x. Hold recommendation.

Lower earnings. Padini’s 1Q17 revenue increased to RM310m (+15%) yoy. Despite the higher revenue, net profit decrease to RM28.6m from RM31.8 (-10.1%) yoy mainly due to increase in operating expenses that was caused by rising costs and sales event done by the group.

Margins contraction experienced. Padini experienced a compression in gross margin and EBIT margin of -5% and -2% respectively. This is mainly due to the higher operational cost of products and aggressive sales and promotions event done by the company. The weak ringgit against Renminbi may increase cost further and would affect the company’s profitability if Padini failed to pass on the cost to customers. Additionally, the group could experience margin contraction in its efforts to stay competitive by maintaining selling price despite rising costs.

Constant dividend paid. Padini had declared a 2nd interim dividend of 2.5sen for FYE 30 June 2017. As to date a total of 5 sen DPS had been declared. We estimate that the whole year dividend would come to a total of 11.5 sen. This translates to a dividend yield of 4.1% for FY17.

Source: BIMB Securities Research - 28 Nov 2016