Period  3Q14/9M14

Actual vs. Expectations Padini reported 3Q14 net profit (NP) of RM21.1m (-25.7% QoQ, -13.7% YoY) which brought its 9M14 NP to RM77.3m (+12.0% YoY). This made up approximately 79% of our RM97.7m full-year forecast and the street’s RM96.8m consensus.

 We deem this to be in line as the 9M earnings typically account for 76-84% of full year results.

Dividends  As expected, a third interim single-tier dividend of 2.5 sen was declared for the quarter to bring the cumulative NDPS to 9.0 sen for the financial year.

Key Result Highlights YoY, 3Q14 revenue grew by 7.3% due to its aggressive new store expansion plan. The group has opened an additional 3 Padini Concept Stores and 4 Brands Outlet stores compared to the same quarter last year. However, a higher increase in operating expenses from the new store openings and the overall gross margin compression (-2.9ppt to 46.2%) caused the NP to fall by 13.7% YoY.

 QoQ, 3Q14 NP declined by 25.7% on the back of a 6.5% drop in revenue. The drop in revenue was due to the lower festive season contribution in this quarter as a result of the early arrival of Chinese New Year in 2014. Lower revenue coupled with the higher operating expenses incurred during the quarter led to a substantial fall in NP.

 YTD, 9M14 revenue and NP rose by 9.4% and 12.0% YoY, respectively. The strong revenue growth was contributed by the aggressive new store openings and the high same store sales growth (SSSG) of 11.6% registered by their Brands Outlet stores. Coupled with a 0.4ppt improvement in gross margins and economies of scale, group PBT margin improved by 0.4ppt to 15.9%.

Outlook  Looking ahead, Padini is looking to further expand its distribution network in the next 2 years, especially in the valuefor-money segment. We view its aggressive new store expansion postively, as it will translate into a higher growth in sales and earnings.

 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 which would see an influx of tourists.

Change to Forecasts We maintain our FY14-15E earnings forecasts of RM97.7m-RM107.6m.

Rating Maintain OUTPERFORM

Valuation  We decide to upgrade our TP from RM1.97 to RM2.13, based on a higher Fwd. PER of 13x over FY15 EPS (12x previously) of 16.4 sen. Our ascribed PER is on par with the retail sector average fwd. PER and implies +0.5x SD above its 3-year average PER. We believe that our ascribed PER is warranted, as the company has outperformed its peers in the current challenging retail environment. Earnings prospect remains promising, backed by its aggressive store expansion plan.

Dividend yield of 5.9% remains attractive among our consumer space.

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