1Q18 CNP of RM31.2m (+9%) is deemed within expectations as first quarter is a seasonally weak quarter. No changes in earnings assumptions. Thus, we keep our TP unchanged at RM4.80. However, we downgrade our recommendation from OP to MP call as we believe the known positives have already been priced in by the 55% appreciation in its share price since our upgrade to OP.

Seasonally weak first quarter. The group reported 1Q18 core net profit (CNP) of RM31.2m (+9%) which accounted for 14%/18% of our/consensus full-year estimates. However, the performance is deemed within expectations as first quarter is a seasonally weak quarter (typically made up c.15-20% of the full-year earnings contribution per the last 3 years) and in anticipation of a stronger 2Q18 from the sales-boosting year-end promotional events. A second interim DPS of 2.5 sen was declared for the quarter. Recall that, a first interim DPS of 2.5 sen had been declared on 25th August 2017 (payment date on 29th September 2017), bringing the YTD-FY18 DPS to 5.0sen, which is within our expectations as 60% of dividend pay-out is typically in 2H.

YoY, 1Q18 revenue increased marginally by 2%, driven by additional sales from 2 new outlets (1 Padini Concept Stores, and 1 Brands Outlet) as well as strong sales growth from its existing stores. Gross profit grew higher than revenue, by 6% as gross profit margin expanded by 1.6 percentage points to 43.1% (1Q17:41.5%) attributed to the new products diversification of 70% from China, 25% from Malaysia and 5% from other countries (e.g. Bangladesh, India, Cambodia and Korea). Coupled with a lower effective tax rate of 25.5% (1Q17: 27.8%), core net profit grew higher by 9%.

QoQ, 1Q18 revenue plunged by 32% attributed to the aggressive promotion for Hari Raya Aidilfitri festive season in the previous quarter. However, gross profit declined slower than revenue by 14%, with substantial improvement in gross profit margin at 43.1% (4Q17:34.4%) attributed to the lower inventories written off at RM1.8m (4Q17: RM26.0m). Coupled with higher selling and distribution expenses allocation of 31.8% (4Q17: 23.5% of revenue), and netted off by a lower effective tax rate of 25.5% (4Q17:27.5%), core net profit declined at a higher rate of 50%.

Earnings momentum to be sustained at the current level. We believe Padini has adopted the right strategy in focusing on the valuefor-money segment in Brands Outlet while the business restructuring in Vincci and Seed has also bore fruits. Moving forward, we expect the earnings momentum to be sustained at the current level, pending the gestation period for its Cambodian operations. We believe Padini is on track to meet its FY18E targeted stores opening of 12 new stores for domestic operation and 3 new stores in Cambodia. (as of October 2017, 3 Brands Outlet stores and 3 Padini Concept stores have commenced operation).

Post results, we maintain our FY18E/FY19E earnings estimate.

Keep Target Price unchanged at RM4.80 based on unchanged 14x FY18E PER in line with +1.0 SD of its 5-year mean in view of its resilient business model. While we are long-term positive on Padini’s earnings growth prospect, the share price had appreciated 55% since we upgraded our call to OUTPERFORM and we believe the known positives have been priced in. Thus, we are downgrading our recommendation from OUTPERFORM to MARKET PERFORM. Key risks include (i) lower-than-expected sales and stores opening, and (ii) higher-than- expected operating expenses.

Source: Kenanga Research - 30 Nov 2017