1H18 CNP of RM81.2m (-2%) came in below expectations at 36%/44% of our/consensus full-year estimates, due to the higher-than-expected operating expenses. We cut our FY18E/FY19E CNP by 13%/3%, on expectations of higher operating expenses. Maintain MARKET PERFORM with an unchanged Target Price of RM5.10 based on higher 14.5x FY19E EPS in line with +1.0 SD of its 5-year mean PER.

1H18 below expectations. The group reported 1H18 CNP of RM81.2m (-2%) which accounted for 36%/44% of our/consensus full-year estimates, below expectations due to the higher-than-expected operating expenses from the opening of new stores. A third interim DPS of 2.5 sen was declared for the quarter, bringing 6M18 DPS to 7.5 sen, as expected.

YoY, 1H18 CNP declined by 2% no thanks to; (i) lower gross profit margin by 0.9ppt to 40.8% from 41.7% in 1H17, attributed to the higher product costs from its major supplier in China (products diversification of 70% from China, 25% from Malaysia and 5% from other countries), and (ii) higher selling and distribution expenses allocation of 28% (1H17: 27% of revenue) from the start-up costs of the new stores. Nonetheless, the negative impact was cushioned by the higher revenue (+5%) driven by additional sales from the 10 new outlets (as of December 2017, 6 Brands Outlet stores, 4 Padini Concept stores and 1 Cambodia Padini Concept Store commencing operation), as well as strong sales growth from its existing stores and lower effective tax rate of 25.4% (1H17: 26.1%).

QoQ, 2Q18 CNP surged by 60% underpinned by: (i) higher revenue (+46%) from the Christmas season and the year-end school holidays, (ii) lower selling and distribution expenses allocation of 25% (1Q18: 32% of revenue) as most of the start-up costs was incurred in 1Q18, and (ii) slightly lower effective tax rate of 25.4% (1Q18:25.5%). Nonetheless, gross profit grew slower than revenue (+33%), with gross profit margin contracted by 3.9ppt to 39.2% (1Q18:43.1%) attributed to the higher product costs from its major supplier in China.

Outlook. We believe Padini has adopted the right strategy in focusing on the value-for-money segment in Brands Outlet while the business restructurings in Vincci and Seed have also bore fruits. Moving forward, we expect the earnings momentum to be sustained at current level, pending the gestation period for its Cambodian operation which is expected to incur higher start-up costs than Malaysian ones. 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.

Cut FY18E-FY19E CNP by 13-3%. We cut our FY18E/FY19E CNP by 13%/3% on expectations of higher operating expenses.

Maintain MARKET PERFORM with an unchanged Target Price of RM5.10 based on higher 14.5x FY19E EPS in line with +1.0 SD of its 5- year mean in view of its resilient business model. Key risks include (i) lower-than-expected targeted stores opening, and (ii) higher-than-expected operating expenses allocation.

Source: Kenanga Research - 27 Feb 2018