Period     3Q13 / 9M13

Actual vs.  Expectations   The 3Q13 net profit (NP) of RM24.8m brought the 9M13 NP to RM69.7m. This made up 76.8% and 78.7% of the street's full year estimates of RM90.7m and our RM88.6m respectively.

We deem this to be in line with estimates as Padini's 9M earnings typically account for 76-84% of fullyear results.  

Dividends    As per our expectations, a single tier dividend of 2.0 sen was declared for the quarter to bring the cumulative NDPS to 8.0 sen for the financial year.

Key Result Highlights   QoQ, the 3Q13 revenue decreased by marginally by 1.8%. Nevertheless, the NP rose by 27.9% due solely to a 3.6ppt (to 49.1%) improvement in gross margins as Padini scaled back on discounting activities during the quarter. Note that we had previously mentioned that gross margins may be at an inflexion point in our last report dated 12th Mar.

  YoY,  3Q13 revenue grew by 15.9% and this was attributed to the extended Chinese New Year festive season in the current year as well as the contributions from the new stores opened in last year. Compared to 3Q12, the current quarter had an additional 3 Padini Concept Stores (PCs) and 4 brands Outlet stores (BOs). However, this had also resulted in higher operating expenses, although Padini still managed to eke out a 2.0% NP growth. 

YTD, the 9M13 revenue also registered a 10.1% growth YoY due to the abovementioned reasons. However, the 9M13 NP dropped by 12.7% mainly because of the lower gross margins recorded in the first half of the financial year (46.1% in 1H13 compared to 50.3% in 1H12).

Outlook    As we look toward FY14, Padini will continue to expand its presence beyond the Klang Valley. The Group plans to open a PC and BO each in Seremban, Miri and Penang, while another PC store will be opened in Langkawi. Collectively, this would add upwards of 85k sq ft of retail floor space to Padini's existing c.720k sq ft.

Change to Forecasts    We maintain our FY13-14E earnings forecasts of RM88.6m-RM108.5m. 

Rating   Maintain MARKET PERFORM

Valuation    We believe that the market has largely priced in the risk of gross margin contraction and higher operating expenses. The stock is also well supported by its attractive FY14E yield of 4.8%. As such, we upgrade our TP to RM2.15 (from RM1.84 previously) based on Fwd PER of 13x over FY14 EPS (11.2x previously) of 16.5 sen, whilst maintaining our MARKET PERFORM call on the stock.

Risks    The potential implementation of the GST and subsidy rationalisation program by the government could potentially hamper consumer spending.

Source: Kenanga