• Padini’s 2QFY18 revenue grew 7.9% yoy on positive sales mainly from new stores opened but net profit fell 8.3% yoy due to lower gross profit margin and rising selling and distribution expenses.

• Against our estimates, 1HFY18 net profit was at 42% of our forecasts. We deemed this as in line as we expect better prospects in 2HFY18.

• Maintain HOLD with a TP of RM5.30 with DCF-derived TP of RM5.30 which is arrived after applying a WACC of 6.8% and terminal growth of 0%.

Earnings performance contributed by new stores and year end sales

Padini’s 2QFY18 revenue grew 7.9% yoy on positive growth from new stores. All brands registered higher sales yoy except for Mikihouse (-2% yoy). However, both core net profit and EBIT level decreased by 0.4% and 3.4%. This is mainly due to lower gross profit margin from 41.8% to 39.2%. Apart from that, selling and distribution expenses increased by 9.4% and attributed to the costs of closing and opening of new stores. This, however may be negated in the future, with possibilities of growing economies of scale, that could reduce the cost in the long term.

Higher revenue growth compared to net profit growth

Looking from qoq perspective, 2QFY18 shows an increase of 46.1% in revenue, and 85.7% in core net profit from 1QFY18, due to Christmas holiday and year end sale, as there is less festivities in 1QFY18. The higher revenue growth compared to decrease in growth can be explained by the higher cost. However, management reassured that restructuring in other brands post-Vincci will be done to manage cost issues.

Expecting higher dividend payout

A 3rd interim dividend of 2.5sen was declared, which makes up a total of 7.5 sen so far for FY18. We expect that another 7.5 sen will be paid which will amount to 15 sen for FY18, implying 50% dividend payout ratio.

Outlook remains stable

We remain cautiously optimistic on Padini’s outlook backed by its strong revenue growth. Padini has a diversified brand names that appeal to customers. Key risk includes weaker consumer sentiment than expected in the future and stronger competition. We expect some earnings recovery because of upcoming Chinese New Year in 3QFY18 and Hari Raya in 4QFY18 respectively.

Maintain HOLD with TP RM5.30

We maintain our TP RM5.30 based on DCF methodology (WACC: 6.8%). Padini has done well to raise themselves in the competitive industry, however this comes with new set of pressures going forward on how do they maintain their current “concept store strategy” and keeping customer’s attention and loyalty. The stock has done well mainly due to their robust net cash position, along with strong balance sheet, but we see subdued performance moving forward.

Source: BIMB Securities Research - 27 Feb 2018