• Padini’s 1QFY19 core profit surprisingly declined 40% yoy and 68% qoq to RM19.6m attributed to higher operation costs. The earnings were below ours and consensus’ FY19 forecast at 9.4% and 9.7% respectively.

• Revenue for the quarter was +4.6% yoy to RM329.8m, coming from positive sales from both existing and new stores opened in the year.

• A second interim dividend of 2.5sen was declared for FY19, payable in Dec 2018, similar to the amount declared last year.

• Maintain Hold with new DCF-derived TP of RM5.00 with WACC of 6.4%.

Cost pressure setting in

Padini’s 1QFY19 revenue increased 4.6% to RM329.8m attributed to positive growth from existing stores and with 5 new Brand Outlet’s (BO) stores opened during the quarter. However, core profit decreased by 40% yoy on the back of higher effective tax rate with low increase in sales. Padini’s EBITDA margin saw erosion by 5.3 ppts, which was attributable to higher staff costs, rentals and stores operations.

Weak performance qoq basis

On qoq basis, 1QFY19 revenue and core earnings fell by a substantial 31% and 68% respectively partly due to seasonal factors. The preceding quarter benefitted from the Hari Raya sales and 4 days of special promotion.

Dividend declared unchanged vs previous year

A second interim DPS of 2.5sen (1Q18:2.5sen). We expect full year DPS of 7sen, translating into dividend yield of 1.3%.

Weaker outlook

We remain wary on Padini’s earnings outlook as the company struggled to offset rising costs. Although revenue continues to grow steadily, profit margin appears to be pressured due partly to its new store openings and possibly cost to retain its market share. Additionally, economy slowing and setting in of minimum wage, expected to take place in 2HFY19, these factors could add pressure on its topline and operational costs.

Maintain Hold with a revised TP RM5.00

We forecast Padini to experience lower net profit annually from FY19- FY20 compared to FY18. We have revised earnings for both years by 47% and 48% respectively. We expect that increase in rental cost is another key challenge for Padini’s business operations. We retain our hold recommendation with a new DCF-derived TP of RM5.00 as opposed to RM6.20 previously. We believe this is fair valuation, which is based on WACC: 6.4%.

Source: BIMB Securities Research - 30 Nov 2018