Result

• Padini registered 1QFY17 net profit of RM28.6mill, declining 23.4% q-o-q and 10.1% y-o-y. Meanwhile, revenue was stood at RM310mil, declined 11.1% q-o-q while rose 15.0% y-o-y.

• Broadly in line. Padini’s 1QFY17 net profit was within our and consensus expectations reaching 20% and 19% of full year net profit estimates respectively driven by new stores expansion and resilient sales from its existing Padini Concept Stores and Brands Outlet Stores. We believe the softer results recorded in this quarter mainly due to seasonal factor while we reckon that next quarter earnings will rebound on the back of year-end sales and special sales promotions as well as Christmas celebration.

Comment

• Higher topline growth amid inspiring performance of both Brands Outlet (BO) and Padini Concept Stores (PCS). The encouraging performance of BO and PCS with the lift from new stores contributed to better yearly growth in the group’s 1QFY17 topline. Furthermore, we reckon the attractive merchandising strategies and change in Group's pricing policy yielded fruitful results to the group. The inspiring performance of Brands Outlet was due to the Group’s successful strategy to market fashionable yet value for-money items to consumers amid rising living cost.

• Nonetheless, its bottomline in 1QFY17 declined for its yearly basis mainly dented by higher costs and sales event as witnessed by 5ppts compression in gross profit margin during the quarter under review.

• Softer quarterly growth. The Group’s 1QFY17 net profit and revenue down qoq, mainly due to absence of big festive season as Hari Raya celebration which fell in early July’16 and consumer had made a purchase earlier in 4QFY16 in conjunction with the celebration instead of spending in this quarter as usual. In addition, the softer growth also attributed by high base in last quarter due to higher sales volume from PCS’ mega sales named `Nationwide 4 Days Special’ with attractive discounted prices from 29 April till 2 May 2016.

• Attractive products offering. We acknowledge that high living costs environment has dented consumer sentiment especially after the implementation of GST. However, we believe Padini manages to perform well in its business and attract more customers to purchase its products in future despite challenging outlook in apparel market. We opine that its attractive mix and match bundling strategy has well accepted by consumers and meet their spending pattern during hard time.
   
• Outlet expansion. For FY17, Padini plans to open another 7-8 more outlets in FY17 in key cities and suburban including 3-4 Brands Outlets and the remaining are Padini Concept Stores. We reckon the continued expansion will drive the earnings going forward. Furthermore, Padini’s domestic operations will remain to be the key driver of its topline and bottomline, with garments, shoes, fashion accessories making up the bulk of the products offered for sale. Besides, its abroad market through its retail stores managed by licensees and dealers will continue to offer a better quality of shoes and fashion accessories carried under the Vincci brand name.
• Impressive growth expected in next quarter. Looking ahead, we expect the group’s upcoming quarter results to be resilient underpinned by year-end sale promotions and shopping spree in conjunction of Christmas celebration. In addition, we reckon the revenue will be boosted by `Padini 4 day’s special sale’ from 3 till 6 Nov 2016. In addition, we also expect its 2HFY17 earnings will remain higher aided by consumers splash the cash during Chinese New Year festival in late Jan’16 as well as Hari Raya celebration in late June’16.

• Proposed interim dividend. The Group has declared second interim dividend of 2.5 sen/share which will go ex on 13 December 2016. We foresee that the Group is on track to dish out net dividend of 10sen/share in FY17, translating into a dividend yield of 3.5% based on latest closing price.

Earnings Outlook/Revision

• We maintain our earnings forecast for FY17-18F.

Valuation & Recommendation

• Maintain BUY with a higher target price of RM3.09 (previous: RM2.91). Our revised target price is now pegged at 14x (previous 13.2x) FY17 EPS, which is +1 standard deviation above its mean PER in view of its encouraging future outlook.

• We continue to favour the Group’s strategy of taping into value-for-money product market via Brands Outlet. We remain positive on the group’s efforts to maintain its focus on merchandising, pricing and promotional strategies by concentrating more on design, quality as well as affordability to bring the high level of satisfaction to its customers.

Source: JF Apex Securities Research - 28 Nov 2016