9M16 net profit of RM100.0m (+61.2% YoY) beat our (96%) and market (91%) expectations due to higher-than-expected profit margins. FY16 DPS of 11.5 sen is within our expectation. Earnings forecasts upgraded by 19.7%-26.3% after assuming higher profit margin. Upgrade to Outperform (from Market Perform) with higher Target Price of RM2.78 (from RM2.21). Our upgrade is premised on solid earnings growth which is on track to achieve record profit level, and sturdy balance sheet to support dividend pay-out.

Above expectations. 9M16 net profit of RM100.0m (+61.2% YoY) was above expectations by matching 96% of our in-house forecast and 91% of the consensus’. The positive deviation can be attributed to higher-than-expected profit margins due to the turnaround in Seed and Vincci segments. As expected, a 4th interim DPS of 2.5 sen was declared on top of a special DPS of 1.5 sen, lifting YTD DPS to 11.5 sen which is close to our forecast of 12.0 sen for FY16.

YoY, 9M16 revenue surged 26.0% to RM952.3m driven by additional sales from 13 new outlets (5 Padini Concept and 8 Brands Outlet) as well as strong sales growth from its existing stores. Gross profit grew slower than revenue by 22.5% to RM402.9m as gross margin was 1.2ppt lower due to the higher costs of merchandise arising from weaker MYR. However, net profit managed to jump by 61.2% to RM100.0m due to the lower selling and distribution expenses allocation (from 25.8% to 23.4% of revenue) and lower effective tax rate (from 30.9% to 26.0%).

QoQ, 3Q16 revenue was flattish (+0.6%) at RM342.4m as both quarters were boosted by seasonality (year-end and Chinese New Year, respectively). However, gross profit grew 4.7% to RM142.3m as gross margin expanded by 1.7ppt which we think can be attributable to lower merchandising costs due to the stronger MYR vis-à-vis 2Q16. As a result, net profit inched up by 6.2% to RM35.1m.

Flying high above headwinds. We are buoyed by the strong set of results that was achieved on the back of weak consumer sentiment throughout the year. We believe Padini has adopted the right strategy in focusing on the value-for-money segment in Brand Outlet while the business restructuring in Vincci and Seed has also borne fruit. Moving forward, we expect the earnings momentum to be sustained, underpinned by the strong brand profile of the Group and the continuous expansion in new stores.

Earnings forecasts upgraded. Our FY16E and FY17E net profits were lifted by 19.7% and 26.3%, respectively, after assuming higher profit margins.

Upgrade to Outperform (from Market Perform) with higher Target Price of RM2.78 (from RM2.21). Correspondingly, with the earnings upgrade, our TP is raised to RM2.78, based on unchanged 13x PER FY17E, which is on par with +0.5SD over its 5-year mean. Our TP offers upside of 21% from the last latest closing price; thus, rating is upgraded to Outperform. Fundamentally, we think the positive revision is warranted by its solid earnings growth (54.5% and 13.8% in the next 2 years) and strong balance sheet position (net cast of RM155.3m or 23.6 sen/share) which can support its dividend pay-out. Valuation is not too demanding considering the Group is on track to achieve its highest ever net profit in FY16. 

Source: Kenanga Research - 19 May 2016