Period

1Q16

Actual vs. Expectations

Padini recorded a 1Q16 net profit (NP) of RM31.8m in comparison to 1Q15 NP of RM19.2m (+65.4% YoY). This beat our in-house/consensus estimates by 9.7%/9.2%.

Dividends

Second interim single tier dividend of 2.5 sen was declared. We deem this broadly in line with our full-year NDPS estimate of 12.0 sen, as we are optimistic of a higher pay out if the Company continues to perform closer to our NP forecasts.

Key Results Highlights

QoQ

1Q16 recorded revenue was higher than 4Q15 by 21.5% at RM269.6m mainly due to the Hari Raya festivities in July, a catalyst for higher consumer spending during the period.

The opening of a new Padini Concept Store and Brands Outlet Store in the newly refurbished Sunway Putra Mall during the later part of 4Q15 also contributed to this quarter due to the new mall attracting high level of pedestrian traffic.

1Q16 profit before tax (PBT) of RM44.3 doubled that of 4Q15 PBT of RM22.0m after finance costs and other income. NP improved by 75.1% QoQ to RM31.8m. YoY

1Q16 top-line sales increased by RM42.9m bringing revenue to RM269.6m (+18.9% YoY). This is mainly attributed to the additional 8 stores opened since 1Q15.

We were surprised that despite the larger and increasing contribution of product share by Brands Outlet products (managed by Yee Fong Hung), gross profit margin managed to increase, though slightly, by 1% as management guided that their products do not command margins as favourable as other Padini brand products. (Refer page 2 of segmental breakdown.)

Better margin was seen with PBT margin and NP margin clocking in at 46.2% (+0.9% YoY) and 11.8% (+3.3% YoY) despite higher cost of sales from weaker Ringgit, as most of the major cost of outlet openings was incurred in the previous financial years.

In spite of the increase in administrative, selling and distributing expenses in 1Q16 to RM84.6m (+12.4% YoY), it appears marginal in comparison to 1Q16 gross profit of RM124.7m (+33.4% YoY). 1Q16 NP has thus outdone 1Q15 NP by 65.4% at RM31.8m.

Outlook

Consumer sentiment could have been discouraged by the GST implemented in April this year. Besides, we also do not rule out that discretionary spending is further dampened by imported inflation (in-line with the prevailing weakness in the Ringgit) as well as lower disposal income arising from higher living cost.

However, management appears to be undeterred by this and persists with continuous expansion in storereach throughout the country, aiming for at least another 10 stores to be opened by end-FY16.

Padini continues to perform well amongst its competitors with reputable store presence and ability to immediately capitalise on the benefits of new store openings.

When macroeconomic headwinds simmer down, we reckon that the company appears well positioned to ride on the up-wave with the advantage of a wider store presence.

Forecasts

Due to better-than-expected results and outlook, we are upgrading our FY16E net profit by 11.4%.

This upgrade coincides with our estimated increase in Same-Store-Sales Growth (SSSG) for the Padini brands at 18.8% in FY16 from our pre-revised SSSG of 8.0%. The resulting increase led us to provide for a FY16E top-line of RM1.1b from RM1.0b. Gross profit margins are relatively similar at c.45.0% but net margin will see an increase to 9.5% from 9.0% as sales base expands.

Further considerations include the addition of 10 new stores by the end of FY16.

Rating

Maintain OUTPERFORM

Valuation

We opine that most of the negatives discussed above could have been already reflected in its current share price.

We are revising our TP from RM1.64 to RM1.82 based on the unchanged 12x FY16E PER over our EPS estimate of 15.2 sen.

In addition, we also like its superior dividend yield offering of 7-8%.

Risks to Our Call

Lower-than-expected operating expense, incurred from the opening of new stores.

Lower spending by consumers due to rising costs

Source: Kenanga Research - 27 Nov 2015