• Overview. 4QFY19 core net profit declined 6.5% yoy to RM56.7m as higher cost dragged earnings lower. On qoq basis, core net profit increased 57.8% on the back of higher profit margin of 11% (+3.4 ppts qoq). The recovery in margin was due to last quarter’s (3QFY19) higher cost from payout of bonus and incentives.

• Key highlights. Although revenue for FY19 increased 6.2% yoy to RM1.8bn on higher sales in existing stores (same-store-sales-growth increased by 4% yoy), profitability has been impacted by escalation in operation cost especially products costs from its largest suppliers (c.70% of products from China), in our view.

• Against estimates: Above. FY19 core net profit of RM167m (-11.6% yoy) was above ours and consensus FY19 earnings forecast at 114% and 112% respectively. The higher-than-forecast earnings was due primarily to operating cost being lower than we projected.

• Dividend. Padini declared similar quantum to last year’s first interim DPS of 2.5 sen, payable on Sept 2019. We expect a DPS of 11.5 sen for FY20, translating into dividend yield of 3.4% at current price.

• Outlook. Despite current rising cost and uncertainties in global economic environment, we expect a stable future earnings growth supported by sustained domestic sales taking into account its competitively-priced merchandises, promotions and special sales events. Additionally, Padini is taking efforts in strategizing is cost structure to protect margin erosion.

• Our call. Maintain BUY with DCF-derived TP of RM5.20 (WACC: 6.4%) at this juncture, pending management meeting and relook at our assumptions. Padini share price has fallen heavily c.40% since it reported a weak 1Q results in Nov 2018. We believe that its current share price has fully reflected its lower earnings. Net cash remained high at RM448m or 68sen/share.

Source: BIMB Securities Research - 28 Aug 2019