5-year net profit CAGR of 24.8%. Padini has a strong track record of revenue and earnings growth. It has a 5-year revenue and net profit CAGR of 18.0% and 24.8% respectively, driven primarily by the aggressive floor space expansion of its high-growth Brands Outlet and Padini Concept stores. In just five years, Padini has almost tripled its floor space to 699,136 sq ft, which a net addition of 129,600 sq in the past year alone. 

Growing beautifully.  With five more stores scheduled to open in early FY14, much of the revenue growth in the interim will come mainly from the gradual maturing of its outlets in new malls, which should then generate a higher per square foot sales. Management has guided that this would be achieved via 1) attracting customer spending by tweaking its store merchandise mix and the perceived value and quality of Padini's offerings, 2) improving the design to delivery of its products to keep up with the everchanging consumer trends and preferences and 3) continuously refurbishing its existing stores to attract customers. We expect Padini to register a revenue of RM802.9m - RM927.1m for FY13-FY14, which translate into revenue growth rates of 11.0%-15.5% for the two years.

Economies of scale.  Padini's operating expenses as a percentage of revenue has been on a declining trend over the past four years as the group benefited from the economies of scale of more outlet openings. In addition, the revenue per square foot for Padini's single brand stores, Brands Outlet stores and Padini Concept stores have been increasing, reflecting management's efficient use of floor space and probably better product mix. As a consequence, we expect the net margins to improve by 13bps-21bps in FY13-FY14E.  

Becoming a dividend yield play. Although Padini does not have a formal dividend policy in place, the group has been paying out 35%-49% of its earnings in the past five years. We believe that with the minimal CAPEX plans expected for FY13-FY14E, it is likely that Padini will adopt a higher dividend payout ahead. Based on our FY13-FY14 net profit estimates of RM107.9m-RM120.5m, we expect the company to distribute a DPS of 8 sen-9 sen, translating into attractive dividend yields of 4.4%-4.9%.    Initiating Coverage on Padini Holdings Berhad with  a MARKET PERFORM rating and a fair value of RM1.84. We have applied a 11.2x forward PER (+1.5 standard deviation above the 5-year Average PER) on our FY13 EPS forecast of 16.4 sen to derive the fair value of RM1.84. We feel that Padini deserves a valuation closer to the larger retail industry players such as Amway and Aeon (which are trading at +2.0SD above the mean of their 5-year average PER) given the company's bigger size and scale relative to the smaller garment retailers. However, with the share price already trading close to our target price of RM1.84, we are initiating coverage on the company with only a MARKET PERFORM rating.

Source: Kenanga