FY18 CNP of RM178.3m (-1%) came within expectations at 98%/103% of our/consensus full-year estimates. Moving forward, based on “Guide on Proposed Sales Tax Rates”, most of apparels merchandise will be charged 10% in sales tax, in which Padini has guided that they will bear the tax cost (if <10%). Thus, we trimmed FY19E CNP by 4%. We raised our TP to RM5.60 based on higher targeted PER of 17x (from RM5.25 previously), however, we downgrade our call to UP from MP as all the positives could have been priced in.

FY18 within expectations. FY18 CNP of RM178.3m (-1%) came within expectations at 98%/103% of our/consensus full-year estimates. Moving forward, based on “Guide on Proposed Sales Tax Rates”, most of apparels merchandise will be charged 10% in sales tax, in which Padini has guided that they will bear the tax cost (if <10%). A first interim DPS of 2.5 sen for FY19 (4Q17: 2.5sen) was declared, within expectation. The group typically finalized its dividend payments in 3Q. Note that the group has declared FY18 DPS of 11.5 sen (FY17:11.5sen), as expected.

YoY, FY18 CNP marginally decreased by 1% due to one-off recognition of inventory write-down of RM22m in FY17. Nevertheless, its reported FY18 NP rose 13% attributed to: (i) higher revenue (+7%) driven by additional sales from 12 new in-house stores (6 Padini Concept Stores, and 6 Brands Outlets Stores) and 3 Cambodian stores (2 Padini Concept Stores and 1 Brands Outlets Stores), (ii) expansion in PBT margin by 0.7ppt to 14.3% from 13.6% in FY17 from lower products costs with the better mix of suppliers, and (ii) lower effective tax rate of 25.6% (FY17: 26.2%).

QoQ, 4Q18 CNP rose 44% buoyed by: (i) higher revenue (+12%) due to the seasonally stronger Hari Raya festive season and maiden contribution for the zero-rated tax holiday as well as four days special sales promotion in June 2018, and (ii) lower selling and distribution expenses allocation of 26% (3Q18: 31% of revenue) from the lower start-up costs of the new stores, as most of the stores opening was completed in 3Q18.

Outlook. Moving forward, we expect the earnings momentum to be limited by: (i) higher costs from the new SST, (ii) the gestation periods for its Cambodian and Thailand operations, which are expected to incur higher start-up costs than Malaysian ones, and (iii) weakening in MYR against major currency (i.e. USD and RMB). Padini has achieved its FY18 target with the opening of 12 new in-house stores and 3 Cambodian stores. For FY19, Padini plans to open not more than 10 outlets for the local market and Thailand market, while maintaining its status quo for Cambodia operations.

Cut FY19E CNP by 4%. We cut FY19E earnings by 4% to account for the higher products cost from the SST implementation and introduce our FY20E CNP at RM230.7m.

Downgrade to UNDERPERFORM (as all the positives could have been priced in) from MARKET PERFORM with a higher Target Price of RM5.60 (based on a higher 17x CY19E EPS, implying +2.0 SD of its 5-year forward historical mean PER to reflect the recovery in consumer sentiment index, CSI, which has reached above the optimum level (i.e. >100) as opposed to RM5.25 previously, which was based on 15x CY19E EPS, implying the +1.0 SD-level).

Risks to our call include: (i) higher-than-expected sales, and (ii) lower- than-expected operating expenses

Source: Kenanga Research - 28 Aug 2018