Period  4Q14/FY14

Actual vs. Expectations Padini’s FY14 net profit came in at RM90.9m, up 6.5% from RM85.4m in FY13 with revenue growth of 9.7%. The result was slightly below expectations with the net figures accounting to 93% and 95% of our earnings forecast and the streets’ estimates, respectively. The negative deviation was due to the higher-than-expected administration expenses as well as selling and distribution costs, which

brought down its PBT margin to 14.5% vs the 15.5% we forecasted.

Dividends  First interim net dividend of 2.5 sen/share (vs 1Q14:2.5 sen/share) was declared, in line with our expectation. We expect a total net dividend of 12 sen/share (FY14:11.5sen/share) to be declared for FY15, translating into a yield of 6.3% based on the last closing price.

Key Results Highlights  YTD, net profit inched up by 6.5% to RM90.9m on the back of higher revenue of RM866.3m (+9.7%) as 7 additional

Brands Outlet (BO) stores (from 20 to 27 stores) and 5 Padini Concept Store (PCS) (from 25 to 30 stores) were opened in FY14. As a result, higher operating costs were incurred with the selling and distribution costs spiking up by 9.3% while the administrative expenses jumped 11% and thus squeezing PBT margin down by 0.4ppt to 14.5%.

 YoY, 4Q14 top line grew 10.7% thanks to the new store openings. However, PBT declined by 10.7% as 4 promotional clearance events were held as compared to only one in 4Q13, while more than 40% or 5 of its new stores were opened in the quarter, that together lifted its selling and distribution costs by 16.6%.

 QoQ, vis-à-vis the strong 3Q14 which was boosted by the Chinese New Year festivities, the revenue shrank 10.4% while net profit tumbled 35.3% to RM13.7m. The weaker net profit was due to the promotional activities mentioned above and further dragged down by higher effective tax rate of 29.8% (vs 24.8%) as some of the expenses incurred during the quarter did not qualify for tax savings.

Outlook  Despite the minor earnings setback, we remained cautiously optimistic on the Group’s outlook. The higher operating expenses incurred as a result of new store openings would be recouped over the long-term as new stores generally take 2-3 years to breakeven. We also expect better numbers in the coming quarter as the sales is expected to be buoyed by the Hari Raya shopping spree in July as opposed to the quiet season during the April-June period.

 Meanwhile, the Group could bear positive news in October this year after the Group reallocated some portion of its cash into the Islamic deposit account in order to comply with the Shariah-compliant requirement as it seeks to return to the rank of the Shariah-compliant list.

 In order to counter lower consumer spending on the back of higher living costs, Padini’s focus moving forward would be toward the value-for-money segment where the Group expects the BO stores to support earnings growth. We expect 6 new BO stores to be opened in FY15 with estimated total floor area of 60k sf, depending on the availability of retail space. Padini also plans to diversify its product portfolio of its BO stores by adding women’s undergarments.

Change to Forecasts  We made housekeeping changes to FY15 earnings forecast as we were updated with the latest store opening plan by the management, which result in a 6% uptick in top line while net profit was revised up by 0.5% as we are more cautious with the operating expenses. We also take this opportunity to introduce our FY16 earnings forecast, which implies a net earnings growth of 7.3% as we assume 6 new store openings in FY16 (vs FY15:10 stores). Meanwhile, SSS growth is projected to be an average of 1.7% in FY16 (vs FY15:1.7%).

Rating Maintain OUTPERFORM

Valuation  We keep our Target Price of RM2.13 unchanged by pegging a forward PER of 13x to FY15 EPS of 16.4 sen, which implies +0.5 SD over its 3-year mean PER. We expect the Group to be more resilient against the subdued consumer sentiment than its peers due to its focus on value-for-money segment, while the aggressive expansion plan could also pave the way for the Group to gain more market share. DY of 6.3% is also deemed attractive enough to support the share price.

Risks to Our Call  The implementation of GST, which could hamper consumer spending.

 Higher-than-expected operating costs.

Source: Kenanga