Result

• Padini registered a net profit of RM55.8m during 2QFY20 which soared 181.8% qoq and 4.9% yoy. Excluding unrealized forex loss, Padini posted a core net profit of RM56.2m which increased 188.9% qoq and 5.6% yoy. On the same note, revenue improved 46.5% qoq and 7.0% yoy to RM495.1m.

• As for 1HFY20, the Group posted core net profit and revenue of RM75.6m and RM883.1m, rising 7.2% yoy and 5.1% yoy respectively. The inspiring results were underpinned by massive sales generated from four new stores which were opened during 2HFY19.

• Above our expectations. The Group’s 6MFY20 core net profit of RM75.6m is above our estimates (63.7%) but substantially below market expectation (only accounts for 32.6% of full year net earnings forecast).

Comment

• Stellar QoQ…. Padini’s revenue and PBT rose 46.5% qoq and 179.6% qoq respectively during 2QFY20. The higher revenue was spurred by Christmas season, year-end school holidays and nationwide 5-days special holiday which held in the current quarter. Meanwhile, PBT margin also increased by 7.2ppts in view of lower operating cost, we believe. Besides, effective tax rate also lower as compared to previous quarter (26% vs 1QFY20:27%).

• …as well as YoY. The Group’s revenue and PBT also improved on yearly basis, rising 7.0% yoy and 4.2% yoy respectively. The better performance was buoyed by stellar sales arising from greater product offerings as well as improved margin. Padini strives to improve product mix which will help to boost its margin going forward.

• Cumulatively, 6MFY20 revenue and PBT improved 5.1% yoy and 3.3% yoy respectively. We believe it was due to better sales in its existing stores coupled with opening of few new stores during 2HFY19 which helped to expand overall business sales.

• Third interim dividend declared. The Group has declared a third interim dividend of 2.5sen/share in respect of FY20. Cumulatively, the Group has paid 7.5sen/share which represents 65.2% of our full year FY20F dividend forecast.

• Neutral Outlook. Looking forward, we expect the Group’s revenue to trend higher in the coming quarter buoyed by higher season such as New Year and Chinese New Year festivals. However, the Group business might be impacted by prevailing Covid-19 virus due to supply disruption. Notably, the product offerings are mainly sourced from China (about 60% to 80%) while remaining from India, Bangladesh and local. Overall, we expect FY20F growth will remain subdued, 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 lift our FY20F and FY21F net earnings forecasts by 15.1% and 10.1% respectively, accounting for better-than-expected margins arising from improved sales mix as well as lower effective tax rate.

Valuation & Recommendation

• Upgraded to HOLD from SELL with a higher target price of RM3.00 (RM2.90 previously) following our earnings upgrade. Our valuation is now pegged at 14.4x FY20F PE with a revised EPS of 20.8sen (18sen previously), close to its 5-year historical mean PE of 15.1x.

Source: JF Apex Securities Research - 27 Feb 2020