Result

• Padini posted a net profit of RM19.8m for its 1QFY20 which tumbled 63.6% qoq but improved 10.2% yoy. Meanwhile, revenue stood at RM338m which was down 34.6% qoq but up 2.5% yoy.

• Below expectations. 3MFY20 net profit is below ours and consensus expectations by only meeting 12% and 8.5% of full year earnings estimates respectively. We deem the softer results recorded in this quarter were due to seasonal factor as we expect stronger upcoming quarter.

Comment

• Disappointing qoq earnings. Padini’s revenue tumbled 34.6% qoq, no thanks to Hari Raya festival sales (in June’19) coupled with 5-day special sales promotion which was held during the last quarter. On the same note, PBT also dropped 6.2 ppts arising from impact of MFRS 16.

• Improved YoY. Despite subdued QoQ earnings, revenue and PBT on yearly basis inched up 2.5% yoy and 1.0% yoy respectively. Higher revenue was spurred by steady sales in existing stores as Same Stores Sales Growth (SSSG) grew 1.0% yoy during 1QFY20 (vs 1QFY19: 0%). Moreover, better earnings were due to lower operating cost, we believe.

• Second interim dividend declared. The Group has declared a second interim dividend of 2.5sen/share in respect of FY20. Cumulatively, the Group has paid 5sen/share which represents 43.5% of our full year FY20F dividend forecast.

• Neutral Outlook. Looking forward, we expect the Group’s revenue to improve in the coming quarter buoyed by higher season. Overall, we expect FY20 growth will remain uninspiring, dented by minimal store expansion in view to maintain its cost allocation as well as lower contribution from its overseas operations (i.e. Cambodia and Thailand). However, the Group will continue to offer more product range to expand their business growths.

• Risks include: (a) Higher-than-expected write off of inventories, (b) Lack of growth prospects and (c) Strengthening of Chinese Renminbi against Ringgit Malaysia.

Earnings Outlook/Revision

• We slash our earnings forecasts for FY20 and FY21 by 40.6% and 31.8% respectively to account for lower-than-expected margin.

Valuation & Recommendation

• Downgraded to SELL from HOLD with a lower target price of RM2.83 (RM3.70 previously) following our earnings cut. Our valuation is now pegged at a 19x FY20F PE with a revised EPS of 14.9sen (25.2sen previously), closed to its 3-year historical +1 standard deviation of of 19.2x.

• We not favor on the stock due to lack of catalyst to drive the share price in the near term as the overseas expansion in Cambodia has yet to render any significant earnings to the Group, whilst local operation is facing saturated growth.

Source: JF Apex Securities Research - 28 Nov 2019