• Overview. 1QFY20 revenue and net profit fell by a substantial 35% and 64% respectively partly due to seasonal factors as well as MFRS 16 impact. The preceding quarter benefitted from the Hari Raya sales and 5 days of special promotion. Profit margin meanwhile dropped to 5.8% (-4.7 ppts qoq).

• Key highlights. Sales improved slightly on yoy basis due to increase in Same Stores Sales Growth (SSSG) by 1%. We expect Padini to record higher sales in 2QFY20 due to special sales promotion and holiday season held during the quarter.

• Against estimates: Below. 1QFY20 net profit of RM19.6m was below our and consensus’ expectations at 12% and 11.5% respectively. The main deviation against our forecast was due to lower sales than expected, higher depreciation and finance cost.

• Dividend. A second interim DPS of 2.5sen (1Q19:2.5sen). We expect full year DPS of 11sen, translating into dividend yield of 3.2%.

• Outlook. We are turning more cautious on Padini’s near-term outlook due to uncertainty in global and domestic economy, subdued consumer sentiment as well as stiffer competition and saturation in the fast fashion retailing industry. Profit margin is expected to be under pressure on higher operating cost.

• Change in forecast. Following this result, we have cut our FY20-21E EPS forecast by 11%-10% as we adjusted our sales lower and depreciation higher.

• Our call. We downgrade our call to HOLD with DCF-derived TP of RM3.80 (previously RM5.20). This is based on WACC: 64% and lower terminal growth rate of 0.5% to reflect the challenging business environment on brick and mortar retail business.

Source: BIMB Securities Research - 28 Nov 2019