• Padini’s 3QFY18 core earnings grew 16% yoy on positive sales from existing and new stores opened but fell 17.8% qoq due to a lower seasonal quarter especially after Christmas and year-end sales.

• Against our estimates, 9MFY18 core earnings were slightly below our forecast at 66.5%.

• A 4th interim and special dividend of 2.5sen and 1.5sen was declared, bringing total DPS in FY18 to 11.5sen (vs FY17: 11.5sen).

• We tweaked our FY18/FY19/FY20F earnings lower by 3.5%/2%/2% to factor higher operating costs. Our new DCF-derived TP is RM5.70 (from RM5.30) after rolling over to FY19.

Driven by higher sales from all Padini segments

Padini’s 9MFY18 revenue increased 8.2% to RM1.2bn. This is due to positive growth from existing stores and new stores opened (6 PCS, 6 BO) during the 9 month period. Additionally, all brands registered higher sales yoy. Core net profit increased 5.4% to RM128m on the back of higher sales and lower effective tax rate of 23.9%. Despite the positive growth, EBITDA margin came in lower by 1.1ppts from 17.1% to 16%. We believe this is due to higher operating costs which is likely derived from higher rental and staff costs ahead of more PCS and BO outlets opened.

Poor performance qoq basis

On qoq basis, 3QFY18 revenue and core earnings fell 7.6% and 17.8% respectively due to a strong 2QFY18 on the back of seasonal sales from Christmas and year-end school holidays. Core earnings fell further to 17.8% due to higher operating costs which compress margin by 2.4ppts.

Dividend declared unchanged vs previous year

Padini declared a 4th interim DPS of 2.5sen and special DPS of 1.5sen. This brings the total DPS declared for FY18 to 11.5sen (vs FY7: 11.5sen), translating to 2.1% dividend yield.

Outlook remains intact

We remain positive on Padini’s earnings outlook backed by sound management, value-for-money market positioning and gradual recovery in consumer sentiment due to increasing purchasing power on the back of GST abolishment. Additionally, we expect earnings to rebound in 4QFY18 ahead of the Hari Raya festivities, Padini 4-day sale and mid-year sale.

Maintain Hold with new TP RM5.70

We tweaked our FY18/19/20 earnings forecast lower by 3.5%/2%/2% respectively, to reflect higher-than-expected operating costs. Our DCF derived (wacc: 6.8%) new TP of RM5.70 (from RM5.30) after earnings adjustment and rolling over to FY19 figures. Maintain Hold as we believe positive earnings prospect has been largely priced in.

Source: BIMB Securities Research - 24 May 2018