9M18 CNP of RM121.0m (+3%) appears to be below both our/consensus expectations at 66%. However, we consider the results to be within expectation as we expect a much stronger upcoming quarter with the sales-boosting Hari Raya festive season and higher sales contribution from zero-rated GST. Maintain MARKET PERFORM with a higher TP of RM5.25 as we change our valuation year to CY19E (from TP of RM4.65 based on FY19E).

Expecting stronger upcoming quarter. 9M18 CNP of RM121.0m (+3%) appears to be below both our/consensus expectations at 66%. However, we consider the results to be within expectation as we expect a much stronger upcoming quarter with the sales-boosting Hari Raya festive season and higher sales contribution from zero-rated GST effective 1 June 2018. A fourth interim DPS of 2.5 sen and a special DPS of 1.5 sen was declared for the quarter, bringing FY18 DPS to 11.5 sen, as expected. The group typically finalized its dividend payments in 3Q.

YoY, 9M18 CNP increased by 3% underpinned by; (i) higher revenue (+8%) driven by additional sales from the 12 new outlets (as of March 2018, 6 Brands Outlet stores, 5 Padini Concept stores and 1 Cambodia Padini Concept Store commence operation), and (ii) lower effective tax rate of 23.9% (9M17: 25.7%). Nonetheless, its PBT margin contracted by 1.1pp to 13.2% from 14.3% in 9M17 attributed to the higher product costs from its major supplier in China as well as higher selling and distribution expenses allocation of 29% (9M17: 28% of revenue) from the start-up costs of the new stores.

QoQ, 3Q18 CNP plunged by 20% no thanks to: (i) lower revenue (-8%) due to the seasonally stronger Christmas season and year-end school holidays in 2Q18, and (ii) higher selling and distribution expenses allocation of 31% (2Q18: 25% of revenue) from the start-up costs of the new stores, especially from the Cambodia Padini Concept stores.

Outlook. With the zero-rated GST starting 1st June 2018, Padini, which had previously absorbed GST into their respective merchandising prices, may lower its selling prices for all of its brands in which enable consumer to purchase in a larger volume. We believe Padini has adopted the right strategy in focusing on the value-for-money segment in Brands Outlet while the business restructuring in Vincci and Seed have also born fruits. Moving forward, we expect the earnings momentum to be sustained at the 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.

Maintain MARKET PERFORM with a higher Target Price of RM5.25 (from TP of RM4.65 based on FY19E) as we change our valuation year from FY19E to CY19E for a better comparison on the impact of zerorated GST, which will be implemented on 1st June 2018. Our current valuation is based on 14.5x CY19E EPS in line with +1.0 SD of its 5- year mean in view of its resilient business model. Risks to our call include: (i) lower-than-expected targeted stores opening, and (ii) higher-than-expected operating expenses allocation.

Source: Kenanga Research - 24 May 2018