Padini’s 1H17 net profit at RM83.1m (28.0% YoY) beat both our (59.8%) and consensus (55.8%) expectations. This was largely driven by promotional activities capitalising on the year-end and Christmas shopping season. Total DPS declared in 1H17 of 7.5sen were within expectations. FY17E-FY18E earnings increased by 6.3%/6.4% after imputing more positive same-store sales growth, coupled with the expansion of new stores. Maintain MARKET PERFORM on PADINI with higher TP of RM2.83.

Results above expectations. 1H17 net profit at RM83.1m (28.0% YoY) was above expectations at 59.8% of our in-house forecast and 55.8% of the consensus. The positive deviation can be attributed to higher-than-expected sales throughout the segment as a result of aggressive promotional and sales events during the festivities season. As expected, 3rd interim DPS of 2.5 sen was declared, bringing total DPS declared in 1H17 to 7.5sen (1H16: 9.0sen).

YoY. 1H17 revenue jumped 20.8% to RM736.7m driven by 12 new stores openings (5 Padini Concept Store, 8 Brands Outlet). In addition, the company enjoys a more streamlined store base with a lower concentration of concession stores in favour of more profitable freestanding stores. The 1H17 PBT margin rose 0.7 ppts to 15.3% from 14.6% in 1H16 due to higher revenue (+20%) which more than offset the higher operating expenses. 1H17 net profit rose 28.0% to RM83.1m.

QoQ, 2Q17 revenue increased 37.6% to RM426.6m due to the absence of festivities in 1Q17. 2Q17 PBT margin rose 4.2 ppts to 17% from 12.8% in 1Q17. As a result 2Q17 PBT rose 84% boosted by higher revenue (+37.6%) which more than offset a higher operating expenses (+16.7%). Correspondingly, 2Q17 net profit surged by 90.4% to RM54.5m due to a lower effective tax rate of 25.1% compared to 27.8% in 1Q17.

Stronger seasonality ahead. 2Q17 sales were stronger 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 for year-end peak season as well as to spur sales in the absence of festivities during the previous quarter. We are still cautious on the prospects 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 festivities and school holiday ahead.

Improved earnings forecast. We increased FY17E and FY18E net profits by 6.3% and 6.4%, respectively. We impute more positive same-store sales growth, expansion of new stores and are expecting a sales recovery in coming quarters.

Maintain MARKET PERFORM with higher Target Price of RM2.83 (previous TP: RM2.66). We upgrade our TP based on an unchanged 11.6x PER CY17E, which is on par with its 5-year mean. 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 - 21 Feb 2017