We met up with the PADINI management and came away feeling more neutral on its prospect as the sharp growth in FY16 was a feat that is unlikely to be repeated. FY16 Same Store Sales Growth (SSSG) was driven by favourable product mix and seasonality while selling prices will not be dropped further despite competition. We downgrade PADINI to MARKET PERFORM with an unchanged TP of RM2.96 on limited upside after strong YTD rally of 60% and moderate growth moving forward.

Sharp rise in SSSG propelling growth. PADINI achieved FY16 SSSG of 23% (vs. FY15: 7%), with Padini Concept Stores (31%) and Brands Outlet (16%) being the key brands spearheading the encouraging growth. Management attributed the solid performance to more favourable product mix as the strategy to offer better quality merchandise paid off. Besides, FY16 consolidated two Hari Raya festivals due to the coincidental timing (July 15 and June 16) and thus provided an extra boost to SSSG. Meanwhile, total 14new stores were opened during FY16 (vs FY15: 11 stores). Both SSSG and new store openings contributed to impressive top line growth of 33.1% to RM1.3b in FY16.

Striving to protect margin. FY16 gross margin declined by 1.5ppt to 41.7% as a result of the competitive landscape and higher product sourcing costs arising from weak local currency. However, gross margin is not expected to fall below the 40% mark as management is not prepared to further lowering the price levels. The strong growth in top line has generated economies of scale while A&P expenses also moderated thanks to the maturity of brand names, resulting in PBT margin expansion (by 2.9ppt to 14.3%) and PBT growth (by 67% to RM186.7m). However, wage expenses are expected to inch up albeit in a manageable manner moving forward due to the indirect effect of minimum wages starting July 2016 and also to reduce staff attrition rates.

Succession well planned. The recent departures of key personnel (Mr. Chan Kwai Heng and Mr. Cheong Chung Yet, both executive directors) are not expected to disrupt the operations or strategy planning of the company with a sound succession plan in place. New replacements have the experience and expertise after being groomed and mentored by their predecessors for years while the existing management system is independent enough to limit the reliance on any single management personnel. Thus, management is hopeful of a smooth transition.

Uneven store openings in FY17. Moving forward, the Group expects 7-8 new store openings in FY17, depending on the availability of space and the timing of new mall openings. However, we understand that most of the new store openings are skewed towards the end of FY17. Hence, the growth in the first nine months of FY17 would depend solely on SSSG without the contribution boost from new stores.

Downgrade to MARKET PERFORM (from OUTPERFORM) with unchanged Target Price of RM2.96. Post-meeting, we made no changes to our earnings forecast and TP, based on 13x PER FY17E which implies +0.5 SD over 5-year mean. After strong YTD share price rally of 60%, our TP now offers limited upside (including dividend yield) which prompted our rating downgrade. Fundamentally, we believe the strong growth in FY16 has been fairly priced in by the market and growth is expected to moderate moving forward from a high base that was aided by seasonality and restructuring. Nonetheless, we still like the company for its established brand names, sturdy balance sheet and generous dividend pay-out.

Source: Kenanga Research - 21 Sep 2016