Result

• Padini reported a net profit of RM39.8m for its 3QFY18. The quarterly net profit dropped by 20.4% qoq but increased by 14.3% yoy. Meanwhile, the Group’s revenue decreased by 7.6% qoq whilst increased by 13.8% yoy.

• For 9MFY18, the Group achieved a higher topline and bottomline of 8.1% and 2.6% respectively.

• Below expectations. The Group 3QFY18 net profit is below our and consensus expectations, reaching 61% of our consensus and 66% of market forecast of full year net profit estimates. We deem the softer results recorded in this quarter were due to lower sales revenue amid seasonally weaker quarter.

Comment

• Lower earnings QoQ. The Group recorded a decrease in revenue mainly due to special promotion campaign, Chrismas season and year end school holiday during 2QFY18. Besides, a lower PBT is recorded as a result of higher selling and distribution costs (PBT and PBT margin down by 25.3% and -2.8ppts respectively.).

• Better earnings YoY. As compared to 2QFY17, higher revenue was reported mainly underpinned by increased number of outlets of 6 Padini Concept stores and 6 Brands Outlet stores. Hence, revenue and PBT up 13.8% and 7.8% respectively. However, PBT margin down by -0.6ppts due to higher selling and distribution costs.

• Slightly better earnings for 9MFY18. Likewise, the Group achieved better earnings mainly due to higher revenue achieved due to the abovementioned reasons as revenue and PAT up 8.1% and 2.6% respectively.

• Dividend declared. The Group has declared a 4th interim dividend of 2.5 sen/share and a special dividend of 1.5 sen/share.

• Neutral Outlook. We believe that the Group will continue to generate better revenue in the coming quarter pursuant to Hari Raya festive season along with the reduction of GST rate which would increase consumer spending power. However, we reckon that the Group has reached its stable growing stage due to lower sales growth per store whilst the overseas expansion in Cambodia has yet to render any significant earnings to the Group.

• Risks include threat of competition due to low entry barrier and higher-than-expected selling and distribution costs.

Earnings Outlook/Revision

• We slash our net earnings forecasts for FY18F and FY19F by 16% and 26% respectively as we foresee lower-than-expected sales growth along with surging selling and distribution costs. Still, our net profits for FY18F and FY19F represent a growth of 4.5% and 4.5% respectively.

Valuation & Recommendation

• Maintain HOLD with a lower target price RM5.15 (previous target price of RM5.76) after adjusting downwards of our forward earnings. Our revised target price is now pegged at PE of 19x FY19F EPS (+2 sd above mean). Despite the stock is fully valued at this junction, we favour the Group for its strong brand name among Malaysian households and trendy yet value-for-money products offerings.

Source: JF Apex Securities Research - 24 May 2018