• Padini’s 1QFY18 core earnings grew 1% yoy on positive sales from existing stores and new stores opened but fell 21% qoq due to a seasonally weak quarter especially after sales during Hari Raya and Padini’s 4-day special sales.

• Against our estimates, 1QFY18 earnings were at 15% of our forecasts which we deem it as being inline due to seasonal factors; earnings are typically strong in 2Q and 4Q. No change to our estimates.

• Despite the commendable performance, we downgrade to stock to HOLD with an unchanged DCF-derived TP of RM5.30 which is arrived after applying a WACC of 6.8% and terminal growth of 0%.

Cost pressures setting in

Padini 1QFY18 revenue grew 1.7% yoy on positive growth from existing stores and newly-opened stores. All brands registered higher sales except for Yee Fong Hung (-4% yoy). However, core profit (exclude Landlord’s fit out contribution worth RM3m) grew by only 1% yoy to RM28m on the back of lower effective tax rate, and higher net interest income. At the EBIT level, earnings fell 4% yoy as margin eroded by 0.7ppts on higher selling & distribution costs which is likely derived from higher rental and staff costs ahead of more PCS and BO outlets opened during the quarter.

Lower qoq earning performance

On qoq basis, 1QFY18 core earnings fell 54% mainly on seasonal factors; the 4Q17 benefited from the Hari Raya festive season sales and a 4-day special sales promotion.

Dividend declared

A 2nd interim dividend of 2.5sen was declared, matching 1QFY17 DPS. We expect 15sen DPS declared in FY18E, implying 2.9% dividend yield.

Outlook remained intact

We remain positive on Padini’s outlook backed by its: i) value-for-money proposition, ii) new store expansion of which 6 are PCS and 6 more BO in FY18. Padini has also done well to contain its cost by diversifying its supplier base. We expect some earnings respite amidst seasonality factors such as Christmas and school holidays as well as Padini 4-days sales. Additionally, 2HFY18 performance will also be supported by the CNY and Hari Raya festivities sales.

Downgrade to HOLD with TP RM5.30

We maintain our TP RM5.30 based on DCF methodology (WACC: 6.8%). While Padini has done well to contain costs in prior quarters, we believe the weaker EBIT margins indicate cost pressures are starting to set in. The stock, however, offers decent yield and payout while commanding a robust balance sheet. Downgrade to HOLD.

Source: BIMB Securities Research - 30 Nov 2017