Value for Money

Padini is a home grown apparel retailer with more than 200 stores, owning some of the well-known brands such as Padini, Vincci, Seed, P&Co and Miki. By adopting effective strategy during times of weak consumer sentiment, Padini has recorded impressive quarterly results. Management intends to open more stores going forward to capture market share. It is currently trading at 15x forward PE, compared to 21x average PE for the consumer sector.

Update on Store Expansion

13 stores have been opened so far in FY17, including 5 Padini Concept Store (PCS), 7 Brands Outlet (BO) and 1 free standing store. According to management, currently the total number of PCS and BO stores are estimated to be about 40 each, totalling 120 stores if free standing stores are included. In FY18, it aims to open additional 15 stores to capture market share. While some consignment counters have been closed down, management guided that the rationalization works are mostly done and it will keep the remaining ones, which are profitable (ie. counters in AEON, Parkson, and Sogo).

Cost Is Managed Well to Maintain Its Margin

Management believes that gross margin could stay at the 40% level consistently, mainly because of its good relationship with suppliers who give better prices when Padini purchases in bulk. In the long term, there is a possibility that its GPM may improve as the business scale grows, and it can negotiate better pricing. However, as Padini is expanding stores, it may incur higher marketing, staff, and store opening costs, diluting its PBT margin. Nonetheless, management does not discount the possibility of a net profit margin expansion in FY17 vs FY16. In terms of currency movement, Padini does not see Ringgit strength impacting its earnings much despite some raw materials and manufacturing coming from China. This is because the deals with suppliers are negotiated in Ringgit terms.

Lower Valuation Versus Peers

According to Bloomberg consensus, Padini is currently trading at 15x FY17E PE (vs Bonia (BON MK, RM0.62, Sell) at 18x and KLCSU (Bursa Consumer Index) at 21x), a lower valuation relatively to its peers. Padini has the ability to curate clothes that are fashionable with an affordable price tag, which bodes well for consumers especially in times of weak consumer sentiment when there is less discretionary spending. We are expecting the 2H17 general economic outlook to improve due to stronger economy and Ringgit strengthening, which could help retailers including Padini. There may be some reversal of the down trading trend seen in the past if sentiment turns for the better. We note that Padini has a strong local brand presence and a loyal customer base.

Source: Affin Hwang Research - 8 Jun 2017