FY16 net profit of RM137.4m (+71.3% YoY) beat our (110%) and market (106%) expectations due to higher-than-expected sales growth. As expected, DPS of 2.5 sen declared for 1Q17 while total DPS in FY16 was 11.5 sen. FY17E earnings upgraded by 6.4% while FY18E introduced (17% net profit growth). Maintain OUTPERFORM with higher Target Price of RM2.96 (from RM2.78). Positive rating is premised on solid earnings growth and undemanding valuation.

Positive surprise for the fifth time in a row. FY16 net profit of RM137.4m (+71.3% YoY) was above expectations by matching 110% of our in-house forecast and 106% of the consensus’. This marked the 5th consecutive quarter of results beating our expectation. The positive deviation can be attributed to higher-than-expected sales growth. As expected, first interim DPS of 2.5 sen was declared for 1Q17 (vs: 1Q16: 2.5 sen). To recap, total DPS declared for FY16 was 11.5 sen (vs FY15: 10sen).

YoY, FY16 revenue jumped 33.1% to RM1.3b driven by the 16 new store openings (10 Brand Outlets and 6 Padini Concept Stores) and sales growth from existing stores. FY16 gross profit growth was slower than revenue growth at 28.5% to RM542.6m due to thinner gross margin of 41.7% (- 1.5ppt from 43.2% in FY15) as the Group retained its selling prices despite rising costs to stay competitive. FY16 PBT rose 66.9% to RM186.7m driven by modest spending in selling and distribution costs (+16.6% vs. +33.1% in revenue). As a result, FY16 net profit catapulted by 71.3% to RM137.4m, further aided by lower effective tax rate of 26.4% (FY15: 28.3%).

QoQ, 4Q16 revenue was flattish (+1.9% to RM348.9m) as compared to 3Q16 as both quarters were boosted by festivities (Hari Raya and Chinese New Year, respectively). Gross margin further narrowed to 40.0% (-1.6ppt from 3Q16) due to reason mentioned above which caused 4Q16 gross profit to decline marginally by 1.9% to RM139.7m. However, lower administrative expenses (-15.7%) more than offset the weaker gross margin with PBT managed to record a growth of 11.4% to RM51.6m. However, 4Q16 net profit only grew 6.3% to RM37.4m due to higher effective tax rate (27.5% vs. 24.1%).

Striving despite headwinds. We are pleasantly surprised by the strong performance, particularly on the solid sales growth achieved on the back of weak consumer sentiment and higher merchandise costs driven by weak local currency. We laud the Group for adopting the right approach in focusing on value-for-money brands as well as maintaining its competitiveness by retaining selling prices. 1Q17 results might soften due to the lack of festivities, but we are convinced with the growth strategy the Group is embarking on and thus believe that the healthy earnings growth can be sustained.

Upgrading earnings forecasts. We lifted FY17E net profit up by 6.4% after assuming higher sales growth and introduce FY18E earnings with implied 17.2% growth.

Maintain OUTPERFORM with higher Target Price of RM2.96 (from RM2.78). Correspondingly, with the earnings upgrade, our TP is raised to RM2.96, based on unchanged 13x PER FY17E, which is on par with +0.5SD over its 5-year mean. Despite the impressive YTD share price runup of 41.5%, our TP still offers upside of 16.7% (including dividend yield) and thus justifying our positive call. The fundamental of the company is solid with healthy forecast earnings growth moving forward supported by new store openings and organic sales growth while the valuation is not demanding at FY17E PER of 11.5x.

Source: Kenanga Research - 26 Aug 2016