• Overview. 2QFY20 recorded a substantial increase in revenue and net profit to RM495.1m (+46.5% qoq) and RM55.8m (>100% qoq) respectively, mainly due to Christmas holiday period and special 5 days sales. Comparatively there were lesser festivities in 1QFY20. The higher profit growth is also attributed to efficiency in cost management as well as lower effective tax rate, which resulted in margin rising to 11.3% (+5.5ppts).

• Key highlights. 1HFY20 net profit increased by 6% yoy to RM75.4m attributed to positive growth from 4 new stores that were opened in 3QFY19 and 4QFY19. Padini had collaborated with Walt Disney for product lines which cater to Disney fans (both children and adults’ lines). The product lines which have better margin, started sales in November and have exceeded the target set by Disney.

• Against estimates: Inline. 1HFY20 net profit was in-line with our and consensus’ expectations at 52% and 47% respectively.

• Dividend. A third interim DPS of 2.5sen (2Q19:2.5sen) was declared. We expect full year DPS of 11sen, translating into dividend yield of 3.4%.

• Outlook. Despite overcoming rising costs issues which resulted in a slump in its 1QFY20 profit and usually higher 2H seasonality earnings trend, we are cautious on Padini’s near-term outlook. This is due to the recent Covid-19 outbreak that started in China is still fluid which could disrupt the supply chain and affect sales.

• Our call. Maintain forecast at this juncture and TP of RM3.80 based on DCF valuation (WACC: 6.4%). Padini’s share price has fallen since announcement of a weak 1Q results and is down by c.9% on WHO confirmation Covid-19 virus outbreak in January. Nevertheless, we now see value emerging in the stock with an upside of 17%. Upgrade to BUY

Source: BIMB Securities Research - 27 Feb 2020