FY17 core net profit of RM189.6m (+34%) excluding the inventories written off came in above expectations at 118%/120% of our/consensus full-year forecasts due to lowerthan expected operating expenses. Post results, we increase our FY18 earnings by 20% and we introduced our earnings assumptions for FY19 (at RM239.9m), as we impute more positive same-store sales growth coupled with the expansion of new stores. As such, we increase our TP to RM4.60 (from RM3.80, previously). Reiterate OUTPERFORM.

FY17 above expectations. FY17 core net profit at RM189.6m (+34%) excluding the inventories written off (at RM32.2m) was above expectations at 118% of our in-house forecast and 120% of consensus due to lower-than expected operating expenses. An interim DPS of 2.5 sen and a special DPS of 1.5 sen was declared, bringing the FY17 DPS to 11.5 sen (FY16: 11.5 sen), which was below our expectation (of 14.5 sen for FY17).

YoY, FY17 revenue surged 21% to achieve record sales of RM1.6bn driven by additional sales from 14 new outlets (6 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% with lower gross margin at 39% (-2.3pts) attributed to higher inventories written off at RM32.2m (FY16:RM10.0m) and the group’s strategy to maintain retail prices in spite of pressures from rising costs arising from weaker MYR. Nonetheless, excluding the inventories written off, core net profit grew higher by 34% on the back of lower selling and distribution expenses allocation of 27% (FY16: 28% of revenue) and lower effective tax rate at 26.2% (FY16:26.4%).

QoQ, 4Q17 revenue surged by 23% attributed to the aggressive promotion for Hari Raya Aidilfitri festive season. However, gross profit grew slower than revenue by 3% with lower gross margin at 34% (- 6.7pts) attributed to higher inventories written off at RM26.0m (3Q17:RM2.3m) and the group’s strategy to maintain retail price in spite of the pressures from rising costs arising from weaker MYR. Nonetheless, excluding the inventories written off, core net profit managed to jump 76% due to lower selling and distribution expenses allocation of 24% (3Q17: 29% of revenue), and netted off by a higher effective tax rate of 27.5% (3Q17:25.0%)

Flying high above headwinds. We are positive on the strong set of results that was achieved despite the 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 increased our FY18 earnings by 20% and we introduced our FY19 earnings assumptions (at RM239.9m). We impute more positive same-store sales growth (SSSG) coupled with the expansion of new stores. We understand that Padini is planning to open another 12 new stores for FY18. We assume the same for FY18 and we assume another opening of 12 new stores for FY19.

Maintain OUTPERFORM call with a higher Target Price of RM4.60 (from RM3.80, previously), based on PER of 13.4x against FY18E EPS, which is in line with +0.5 SD over its 5-year forward average PER. The share price rose 29% since we upgrade our call to OUTPERFORM and we believe the dividend yield of 3% on the back of sturdy balance sheet and strong operating cash flow should continue to provide support to the share price. Reiterate OUTPERFORM call.

Source: Kenanga Research - 28 Aug 2017