9M17 net profit of RM117.9m (+18% YoY) came in within expectations at 79%/76% of our/consensus full-year forecasts. Post results, we revised our FY17E-FY18E earnings higher by 8.2%/8.0%, as we impute more positive same-store sales growth coupled with the expansion of new stores. Upgrade to OUTPERFORM from MARKET PERFORM with a higher TP of RM3.80 (from RM2.83, previously).

Within expectations. 9M17 net profit at RM117.9m (+18% YoY) was within expectations at 79% of our in-house forecast and 76% of consensus. As expected, fourth interim DPS of 2.5 sen and special DPS of 1.5 sen was declared, bringing total DPS declared in 9M17 to 9.0 sen (9M16: 9.0 sen).

YoY, 9M17 revenue surged 16.6% to achieve record sales of RM1.1bn driven by additional sales from 13 new outlets (5 Padini Concept Stores, 7 Brands Outlets and 1 free standing store) as well as strong sales growth from its existing stores. Gross profit grew slower than revenue, by 14.3% to RM460.6m as gross margin was 0.8ppt lower due to the higher costs of merchandise arising from weaker MYR. Nonetheless, net profit managed to jump by 17.9% to RM117.9m due to the lower selling and distribution expenses allocation of 22.8% (9M16: 23.4% of revenue) and lower effective tax rate of 25.7% (9M16: 26.0%).

QoQ, 3Q17 revenue declined by 12.4% to RM373.7m due to higher sales base in 2Q17 from the aggressive promotion for Christmas, Year-End School holidays as well as pre-Chinese New Year seasons. Correspondingly, gross profit dropped by 14.0% to RM153.5m as gross margin was weaker by 0.7ppt which we think can be attributable to higher merchandising costs due to the weaker MYR. Coupled with higher selling and distribution expenses of 23.4% (2Q17: 20.8% of revenue), net profit slumped by 36.1% to RM34.8m.

Flying high above headwinds. We are positive on 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 born 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.

Post results, we revised our FY17E and FY18E earnings assumption higher by 8.2% and 8.0%, respectively, as we impute more positive same-store sales growth coupled with the expansion of new stores. We believe 4Q17 will bring much stronger sales on the back of Hari Raya Aidilfitri shopping season.

Upgrade to OUTPERFORM from MARKET PERFORM with a higher Target Price of RM3.80 (from RM2.83, previously), based on a target PER of 13.4x against FY18E EPS, which is in line with +0.5 SD over its 5-year forward average PER. We believe PADINI is still on the earnings growth trajectory on the back of new store expansion and established brand names. Dividend yield of 4.4% on the back of sturdy balance sheet and strong operating cash flow should continue to provide support to the share price.

Source: Kenanga Research - 31 May 2017