• Padini’s 2QFY19 core profit grew exponentially >100% qoq and 4.7% yoy to RM55m attributed to lower operation costs and increase in sales. Overall 1HFY19 earnings were above our estimate at 68% but in-line with consensus at 46%.

• Revenue for the quarter was +40% qoq to RM329.8m, coming from positive sales from both existing and 4 new stores opened during the quarter.

• A third interim dividend of 2.5sen was declared for FY19, payable in March 2019, similar to the amount declared last year.

• Share price has fallen heavily since Nov 2018. Upgrade to Buy with DCF-derived TP of RM5.00 (unchanged from previously) with WACC of 6.4%.

First half earnings were above our expectation

Padini’s 1HFY19 revenue increased 4.6% to RM792m attributed to positive growth from existing stores and with 4 new ones opened during the quarter. However, 1HFY19 net profit decreased by 13% yoy due to a poor performance in the first quarter. Padini’s EBITDA margin eroded by 1.4 ppts, which was attributable to higher staff costs, rentals and stores operations. Overall, the first half performance exceeded our expectation, particularly coming off the heels of a surprisingly low 1QFY19.

Higher net profit growth for 2Q – a tale of 2 quarters

On qoq basis, 2QFY19 revenue and core earnings increased by a substantial 40% and >100% respectively partly due to Christmas holiday period and 5 days year-end sale as there are lesser festivities in 1QFY19. The higher profit growth can also be explained by efficiency in cost management, which resulted in EBITDA margin rising to 7.3% compared to 1.3% yoy. Recall that Padini recorded a surprisingly low net profit of RM18m for 1Q.

Dividend declared unchanged vs previous year

A third interim DPS of 2.5sen (2Q18:2.5sen). We expect full year DPS of 11.5sen, translating into dividend yield of 3.3%.

Moderate outlook

We remain positive on Padini’s outlook as the company managed to shrug off its issues with rising costs which resulted in a slump its 1Q19 profit. The 2Q results demonstrated resilience and Padini’s ability to improve its profit margin despite cost pressures. On the risk side, its new store openings and cost to retain market share could exert pressure on margins. However, Padini has a diversified brand names that appeal to customers, in our view. We expect more stable earnings for the upcoming quarters due to festive-related buying, i.e. Chinese New Year in 3QFY19 and Hari Raya in 4QFY18 respectively.

Source: BIMB Securities Research - 28 Feb 2019