Period  2Q15/1H15

Actual vs. Expectations  1H15 PAT of RM36m (-37% YoY) was below expectations, representing only 43% and 37% of our and consensus’ full-year forecasts, respectively.

 The shortfall was due to higher-than-expected cost of sales.

Dividends  As expected, a 3rd interim dividend of 2.5 sen was declared, bringing its YTD payout to 7.5 sen.

Key Results Highlights 1H15 vs. 1H14, YoY  1H15 earnings fell 37% due to aggressive promotional and discounting activities as well as increased clearance of slow-moving stocks. However, this was cushioned by top-line growth of 5%, thanks to new stores opening. During the period, profit margins shrunk by 4-7ppts.

 All business segments showed weaknesses (see pg 2).

2Q15 vs. 1Q15, QoQ  Reflecting the Christmas festive season, revenue grew by 8%. However, profit margins contracted by 1-5ppts given the same reasons above.

Outlook  With 12 new stores opening this year (6 Padini Concept Store & 6 Brands Outlet), undoubtedly, costs will escalate due to the gestation phase of these new stores. Hence, over the short-term, this may cap earnings growth given the sudden spike in fixed expenses which increase its operating leverage.

 Also, PADINI is marred by weak consumer sentiment on the back of rising inflationary environment; this will in turn, affect discretionary spending negatively.

 However, over the long haul, when macroeconomic headwinds simmer down, the company is well positioned to ride on the upwave, having already established its store presence.

Change to Forecasts  Given the lacklustre 1H15 results, we toned down our FY15E/FY16E earnings estimates by 12%/4% to RM73m/RM90m from RM83m/RM94m. Essentially, we lowered our gross profit assumption by 2ppts/1ppts.

Rating Maintain OUTPERFORM

Valuation  In tandem with the downward revision in earnings estimates, we reduced our TP to RM1.64 from RM1.70 based on an unchanged 12x FY16 PE (+0.5SD above its 5-year mean). We opine that most of the negatives discussed above are already reflected in its current share price. Also, its superior yield offerings of 7-8% is unignorable; in our view, this payout is sustainable given its sturdy balance sheet which has a net cash pile of RM122m (as at Dec-14) coupled with its strong operating cash flow generation.

Risks to Our Call  Higher cost of living, which could stall consumer spending.

 Higher-than-expected opex, incurred from the opening of new stores. 

Source: Kenanga