Result

• Padini reported a net profit of RM53.2m for its 2QFY19. The quarterly net profit increased by 196% QoQ and 6.4% YoY. Meanwhile, the Group’s revenue increased by 40.3% QoQ and 0.5% YoY.

• Slightly below our expectation but within consensus. The Group’s 1HFY19 net profit is slightly below ours but within market expectation, accounting for 43.6% of ours and 46.1% of consensus estimates. The lower-than-expected earnings mainly due to higher operating expenses (i.e. weaker operating profit margin) in 1QFY19.

• As expected, we deem the better QoQ and YoY results recorded in this quarter due to seasonal factors, i.e. Christmas season, school holidays. Also, the better margin was attributable to lower inventories written down and lower finance cost.

Comment

• Higher earnings QoQ mainly due to higher margin. Higher revenue was recorded due to Christmas season, year-end school holidays and nationwide 5 days special holiday held in the current quarter. A better PBT/PBT margin of 171.2%/7.5ppts was recorded, driven by higher revenue along with lower selling and distribution cost.
   
• Stronger earnings YoY, again due to better margin. As compared to 1QFY19, a slightly higher revenue of 0.5% was reported underpinned by increased number of 4 new stores in 4QFY18. As such, a higher PBT/ PBT margin by 7.8%/1.1ppts was recorded, thanks to lower finance cost and inventory written off.
   
• Weaker earnings for 6MFY19, no thanks to lower margin. The Group recorded lower PBT/ PBT margin of - 9.2%/-1.6ppts, which offset a higher revenue, mainly due to higher inventories written down, increase in staff cost, rental and other store operating expenses.
   
• Dividend declared. The Group declared a 3rd interim dividend of 2.5sen/share. 

• Profit expected to normalize. We foresee that the negative effect from the higher operating expenses had fully incurred in 1QFY19 and the profit will be normalized back to historical level. However, we believe that the overseas expansion in Cambodia will not render any significant earnings contribution to the Group in the short term.

• Risks include: (a) threat of competition from online retailers, (b) lack of growth prospects and (c) further depreciate of ringgit Malaysia against Chinese Yuan Renminbi.

Earnings Outlook/Revision

• We tweak down our earnings forecasts for FY19F and FY20F by 11.2% and 1.1% respectively as we foresee a lower than expected sales growth ahead. Still, our net profits for FY20F represent an earnings growth of 13.2%.

Valuation & Recommendation

• Upgrade to BUY from HOLD with lower target price of RM3.90 (previous target price of RM5.00) as we see value re-emerges following recent selldown of the stock. Our target price is now pegged at PE of 15.42x FY20F EPS of 25.3 sen (+0.5 SD above mean). We like the Group for its strong brand name among Malaysian households and trendy yet value-for-money products offerings.

Source: JF Apex Securities Research - 28 Feb 2019