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