Period  1Q15/3M15

Actual vs. Expectations 3M15 net profit of RM19.6m (-30.6%) was below expectations by accounting for only 18.6% and 17.8% of our in-house forecast and streets’ estimates, respectively.

 The negative deviation can be attributed to the higherthan-expected operating expenses.

Dividends  A second interim dividend of 2.5 sen/share was declared, bringing YTD DPS to 5 sen/share, which is in line with our expectation.

Key Results Highlights YoY, 3M15 revenue grew 4.4%to RM226.7m thanks to the higher contribution (+22.5%) from Brands Outlet (BO) stores on the back of six new store additions. However, the encouraging sales were partially offset by declining sales of the Vincci brands, which fell 11.6%. Meanwhile, 1Q15 net profit experienced a steeper dip of 30.8% to RM19.2m as the Group incurred higher operating costs in relation to aggressive marketing and promotion activities in light of highly competitive market condition, which was worsened by the soft consumer sentiment.

 QoQ, 1Q15 numbers were sequentially stronger with net profit posting 40.9% jump on the back of higher revenue (+15.7%). While the top line growth can be attributed to the festivals of Hari Raya in July and Malaysian Carnival Sale in August, the overwhelming surge in net profit was mainly due to the low base effect as the earnings in 4Q14 was affected by initial start-up costs of new store openings.

Outlook  We are disappointed with the results while also being cognizant of the margin pressure in view of the highly competitive market as well as the gloomy consumer sentiment. Discretionary spending is expected to be toned down but by putting its focus on the value-formoney BO brands, the negative impact could be mitigated.

 We expect stronger quarters ahead, buoyed by the year end festivities and school holidays as well as the opening of IOI City Mall at the end of November, where the Group has two new stores (1 Padini Concept Stores and 1 BO stores).

Change to Forecasts We cut our earnings numbers as the margin compression is worse than we initially expected. As a result, FY15E-FY16E net profits were revised down by 7.9%-10.5%.

Rating Downgrade to MARKET PERFORM (from OUTPERFORM)

Valuation  Correspondingly with the earnings downgrade, our Target Price is adjusted downward to RM1.78 (from

RM2.13), based on a lower PER of 12.6x (from 13x) to FY15E EPS of 14.1 sen, which is closer to its +0.5SD 5-year mean PER to reflect the margin compression as well as weaker earnings growth potential. Potential upside of 6.2% (0.6% capital gain, 5.6% dividend yield) warrants a Market Perform call. With PADINI in net cash position (RM84.4m net cash), we expect dividend yield of >5% to support the share price.

Risks  Higher-than-expected operating costs.

 The implementation of GST, which could hamper consumer spending.

Source: Kenanga