1Q17 net profit of RM28.6m (-10.1% YoY) missed our (19.1%) and consensus (18.8%), expectations, on higher-than-expected selling and distribution costs. Total DPS of 5.0 sen in FY17 was within expectations. FY17E-FY18E earnings trimmed by 9%-8% after imputing more conservative margins. Sales growth momentum should be sustained moving forward on year-end festivities and school holidays, but operating environment remains challenging. Maintain MARKET PERFORM on PADINI with an unchanged TP of RM2.96.

Results below expectations. 1Q17 net profit of RM28.6m (-10.1% YoY) was below expectations by matching only 19.1% of our in-house forecast and 18.8% of the consensus’. The negative deviation can be attributed to the higher-than-expected selling and distribution costs as a result of aggressive promotional and sales events. As expected, 2nd interim DPS of 2.5 sen was declared, bringing total DPS declared in FY17 to 5.0 sen (FY16: 5.0 sen).

YoY, 1Q17 revenue jumped 15.0% to RM310.0m driven by 14 new stores openings (5 Padini Concept Store, 9 Brand Outlet). The strong sales growth was achieved despite the stronger base in 1Q16, which captured the sales boost from Hari Raya as the festival date fell later in 2015 (vs. 2016: captured in 4Q16). 1Q17 gross profit only grew marginally by 3.1% to RM128.6m despite the stronger top line growth as margin narrowed by 4.7ppt to 41.5% attributable to higher sourcing costs on the back of weaker MYR. That resulted in a slid of 10.1% in 1Q17 net profit to RM28.6m.

QoQ, 1Q17 revenue fell 11.1% to RM310.0m as 4Q16 revenue was boosted by Hari Raya festivities. However, 1Q17 gross profit only declined by 7.9% as gross margin improved 1.5ppt to 41.5% which we think may be attributed to better product mix. Meanwhile, 1Q17 PBT dipped 23.1% to RM39.6m as higher selling and distribution expenses (from 22.0% of revenue in 4Q16 to 24.9% of revenue in 1Q17) were incurred in conjunction with the aggressive promotional and sales events. As a result, 1Q17 net profit shrank 23.4% to RM28.6m.

Stronger seasonality ahead. 1Q17 sales were less softer on a QoQ basis than we initially predicted thanks to the aggressive promotional and sales events carried out which we believe were for the purpose of inventory clearance before the year-end peak season as well as to spur sales in the absence of festivities during the quarter. As such, we foresee the selling and distribution expenses to normalize in coming quarters. However, we are still cautious on the prospect ahead in view of the persistently weak consumer sentiment and competitive business environment. On a brighter note, strong sales momentum could be sustained in view of the year-end festivities and school holiday ahead.

Trimming earnings forecast. We trimmed FY17E and FY18E net profit by 9.0% and 7.6%, respectively. We impute more conservative margin assumptions despite expecting a margin recovery in coming quarters as our initial margin assumption was too optimistic.

Maintain MARKET PERFORM with unchanged Target Price of RM2.96. We maintain our TP despite the earnings cut as we roll forward our valuation base year to CY17 (from FY17), based on an unchanged 13x PER CY17E, which is on par with +0.5SD over its 5-year mean. As we earlier expected, FY17 net profit growth will slow significantly due to the high base in FY16, but we believe PADINI is still on the earnings growth trajectory on the back of new store expansion and established brand names. Dividend yield of 4.3% on the back of sturdy balance sheet and strong operating cash flow should continue to provide support to the share price

Source: Kenanga Research - 28 Nov 2016