1H19 CNP of RM71.1m (-12% YoY) came in at 39% of our, and 46% of consensus, full-year estimate. We deemed the results to be within our expectation as we expect a stronger 2H, which typically contributes c.60% to full-year earnings due to the annual CNY and Hari Raya Aidilfitri promotional activities. No changes to our FY19E-20E CNP. We upgrade our TP to RM4.25, from RM4.05 as we roll over our valuation basis to FY20E from CY19E. Reiterate OP.

1H19 deemed within our expectation. 1H19 CNP of RM71.1m (-12% YoY) came in at 39% of our, and, at 46% of consensus, full-year estimate. We deemed the results to be within our expectation, as we expect a stronger 2H, which typically contributes c.60% to full-year earnings due to the annual CNY and Hari Raya Aidilfitri promotional activities. A 3rd interim DPS of 2.5 sen was declared for the quarter, bringing the YTD-FY19 DPS to 5.0 sen, which is within our expectations as 60% of dividend pay-out is typically in 2H.

YoY, 1H19 CNP plunged by 12%, mainly dragged down by: (i) contraction in PBT margin by 1.5ppt to 12.5% from 14.0% in 1H18, from the rise in staff cost, rental and store operating expenses such as absorbing SST in September 2018, which translated into higher selling and distribution expenses allocation at 29% (1H18: 28%), and (ii) higher effective tax rate of 28.0% (1H18: 25.4%). This was despite improvement in revenue (+2%), which was mainly from the significant increase in 2Q sales. Note that, Padini only opened 4 new stores as ofto-date, and has taken over its 7 Vincci stores from franchisees in Thailand.

QoQ, 2Q19 CNP surged 196% buoyed by: (i) higher revenue (+40%) due to the seasonally stronger year-end school holidays, Christmas season, as well as the nationwide 5-day special sales promotion, (ii) expansion in PBT margin by 7.5ppt to 15.6% from 8.1% in 1Q19, as the previous quarter was heavily affected by the absorption of SST pricing, and 2Q saw better pricing strategy across the board after the discounts promotion ended, and (iii) lower effective tax rate of 26.4% (1Q19: 32.5%).

Outlook. We like the stock for its (i) resilient business models, focusing on the value-for-money segment in Brands Outlet, and (ii) expected improvement in SSSG and cost allocation and for FY19 the group will not be opening more than 10 outlets for the local market to streamline cost allocation, while maintaining the status quo for its Cambodia operation. We understand that the new, slower expansion plan is to streamline the operational cost towards strategic locations, while expanding regionally by taking over franchisee of Vincci stores in Thailand (7 stores) to strategically control the stores value.

Upgrade TP to RM4.25, from RM4.05 as we roll over our valuation basis to FY20E from CY19E. Our current TP is based on 14x FY20E EPS on its 5-year forward historical mean PER (from 14x CY19E EPS). Reiterate OUTPERFORM. Risks to our call include: (i) lower-than-expected sales, and (ii) higher-than-expected operating expenses.

Source: Kenanga Research - 28 Feb 2019