Period  2Q14/1H14

Actual vs. Expectations Padini recorded an impressive 2Q14 net profit of RM28.4m (+2.4% QoQ, +48.4% YoY) which brought its 1H14 NP to RM56.1m (+26.3% YoY).

 While the first half of the financial year is seasonally stronger, the results still exceeded expectations, at 60.0% of the consensus full year earnings and 59.3% of our numbers, respectively. Note that earnings in the first half have averaged at 54.5% of full year’s earnings for the past five years.

 The earnings outperformance was mainly due to higherthan-expected gross margins and a slower relative increase in operating expenses.

Dividends  As expected, a third interim single-tier dividend of 2.5 sen was declared.

Key Result Highlights YoY, 1H14 NP rose by 48.4% on the back of a 12.9% increase in revenue. The increase in revenue was underpinned by the Brands Outlet stores which recorded higher same store sales growth (SSSG) of more than 30%. At the same time, overall gross margin expansion (+1.3ppt to 47.0%) and a slower relative increase in operating expenses led to the strong NP growth with net margins increasing by 2.9ppt to 12.1%.

 QoQ, 2Q14 revenue grew by 7.8% due to the Christmas and holiday shopping season. Nevertheless, NP increased by a smaller proportion (+2.4%) as this was caused by the accruing of a portion of the employees' bonuses due for payment in January 2014.

 YTD, 1H14 revenue increased by 10.4% amid an increase in exports in the first quarter as well as due to the better performance achieved by the Brands Outlet stores. Coupled with a 0.9ppt improvement in gross margins and economies of scale as highlighted above, 1H14 NP rose substantially by 26.3%.

Outlook  New 3 Brands Outlet stores and a Padini Concept store were opened in the current financial year. In the coming months, there are plans to add another 3 Brands Outlet stores and another 2 Padini Concept stores which would add upwards of 90k sq ft of retail floor space to >800k sq ft.

 In addition to the new store openings, we are positive on the changes made to merchandise development and pricing strategies, which would allow PADINI to capitalise on the Visit Malaysia Year 2014.

Change to Forecasts We have increased our FY14-FY15E net profit forecasts to RM97.7m-RM107.6m (+3.3%) to reflect higher operating margins (+0.5ppt and +0.9ppt increase EBIT margins) as a result of better economies of scale and operational efficiency.

Rating Maintain OUTPERFORM.

 Our positive view on PADINI is underpinned by new store expansion plans after a year-long hiatus, an anticipated pick-up in SSSG numbers, as well as net cash position and high dividend yield of 7%.

Valuation  We increase our TP slightly from RM1.90 to RM1.97 based on an unchanged Fwd PER of 12x over FY15 EPS.

Risks to our Call  The implementation of the GST and subsidy rationalization program by the government could potentially hamper consumer spending.

 Higher-than-expected operating expenses resulting from new store openings.

Source: Kenanga