Yesterday, Padini announced on Bursa Malaysia that its wholly-owned subsidiary, Vincci Ladies' Specialties Centre SB, has signed an exclusive 10-year master franchise agreement with Singapore's FJ Benjamin group for the latter to distribute Vincci women's shoes and accessories under the brand name 'VNC' in Indonesia.

'Invading' Indonesia. Under the agreement, FJ Benjamin will open a total of 25 stores in Indonesia within the next five years through its Indonesian associate, PT Gilang Agung Persada, which operates more than 90 stores across the country. FJ Benjamin Indonesia has an established presence in the country of more than 30 years. It retails foreign brands such as Banana Republic, Gap, Guess, La Senza, Celine and Givenchy. VNC's sales in Indonesia will be on a cost-plus 15% basis.

A good deal. The previous VNC franchise stores in Indonesia have been languishing due to pricing problems arising from a luxury tax imposed on its products. We view this collaboration positively as it would allow Padini to plant foothold in the huge Indonesian market, which is one of the fastest-growing economies in ASEAN, by leveraging on FJ Benjamin's expertise. Indonesian customers will enjoy the same extensive range of Vincci products as their counterparts in Malaysia due to planned simultaneous launches of all new products in both countries. However, we do not expect any significant contribution from this venture in the next two years. Thus, we are leaving our forecasts unchanged, pending the release of Padini's FY12 results on 29 Aug.

Downgrade to NEUTRAL. Although we still like the group's strong fundamentals and its recent Indonesian expansion, we are downgrading the stock to NEUTRAL, with a FV of RM2.22. We deem the valuation fair given that Padini's share price has appreciated by some 27.6% over the past three months and outperformed the FBM KLCI by 24.1%. The stock has rallied by a whopping 99.1% YTD.

Source: OSK