• We remain wary on Padini’s prospects, post-results briefing which prompted revision to our key assumptions over its long term growth.
   
• We revised our FY21F/FY22F earnings by -20%/-0.3% to factor in the unfavourable conditions, including a normalised rental cost.

• Maintain HOLD and TP of RM2.60. This is based on 18x PER pegged on our new forecast FY21 EPS of 13 sen. Demand is improving but pattern is uneven

Demand is improving but pattern is uneven

Management indicated that demand is gradually improving, but this is visible only during the months of festival season i.e. May – Raya Aidilfitri and July – Hari Raya Haji. Meanwhile, during months of June and August the stores were having a slow period, either in sales or footfall. Location wise, especially outlets at “tourist areas” such as Suria KLCC, Pavillion & Fahrenheit88, did not perform as well as compared to outlets in Shah Alam, Penang and Johor which are in neighbourhood area.

Ecommerce still in infancy.

Online sales contribution during 4QFY20 was still below 1% (previous quarter <1%). Management acknowledged it is relatively small; below RM1m. Nonetheless its promotion through Facebook live channels are getting more crowds. We understand that Padini is still learning the best strategy that can be tapped from online platform. Overall, we think progress with online platform is still quite slow to cushion the weakness from retail store sales. As a comparison, major international brands such as Adidas and Nike, have conducted sales via FB and Instagram on 2 occasions (during & after MCO).

Not yet in recovery mode.

The MCO impact has been fully reflected in 4QFY20. Post-MCO environment, all stores are facing stringent SOP which needed to be adhered to. Limited headcounts allowed and long queue into stores have adversely impacted the number of footfall. If current condition persists, it will be a difficult for sales volume to catch up with the pre-covid19 conditions, in the near-term.

Earnings revision to incorporate slowing sales

We cut our FY21F/FY22F earnings lower by 20%/0.3% respectively, as we factor in i) challenging economic conditions that will affect sales volume and ii) normalised rental cost. We now expect net profit margin to be lower at 6%/8% in FY21/22 compared to 8%/8% in our previous forecast.

Maintain HOLD with TP RM2.60.

Maintain HOLD with a DCF-derived TP of RM2.60 (WACC: 8.5%, terminal growth rate: 0.5%), implying FY21/22F PE of 18x/14x. We remain wary of its long-term prospects given the impact of the pandemic, due to i) absence of a strong online platform to cushion weak retail sales; ii) low consumer spending on discretionary items; iii) being too dependent on traditional festival promotions; iv) stringent government SOP that has adversely impact stores’ footfall.

Conference call key highlights

Below are highlights of briefing to analysts conducted on Wednesday 2 September.

4QFY20 & Post-MCO demand

• Management disclosed that since beginning of May, half of the stores are open.

• There is pick up in volume and sales due to Hari Raya in May, but June was a quiet month.

• Sales picked up in July due to the Raya Haji festival, however sales were back in slowdown mode in August.

• Padini needs to adhere to SOP strictly, certain outlets are having long queues because of limit imposed on number of customers in stores. This has negatively impacted Padini’s sales and foothold.

• Location-wise, “tourist areas” such as KLCC, Pavillion & Fahrenheit88, have underperformed as compared to outlets in Shah Alam, Penang and Johor which are within neighborhood area.

• Consumersare still cautious on spending on discretionary items, coupled with fear of going to crowded malls.

Number of stores

• No change in number of existing stores and there is no plan to open new stores in the near term

Rental Waiver

• Rental waiver is not fixed, there are certain months they may get 10%-20% at certain malls.

Online Platform

• 4Q20 online sales contributed less than RM1m, which is approximately still less than 1% of total sales.

• The facebook live channels are getting more crowd, however this has not translated into visible sales amount.

• Padini is working on its back-end system, once this done they should be able to tag along with other online portals.

• Management guided that for FY21, they do not expect a significant capex allocation for ecommerce platform.
   

Source: BIMB Securities Research - 7 Sept 2020