9M19 CNP of RM105.7m (-13%) came below our expectation at 60%, but appears to be in line with the consensus at 71% of full-year estimate. Our negative variance was due to the lower-than-expected gross profit margin and higher-thanexpected effective tax rate. This was despite a better festive season sales contribution. As such, we cut our FY19-20E CNP by 14-6%. Downgrade to MP from OP with a lower TP of RM4.00 (from RM4.25).

9M19 below our expectation. 9M19 CNP of RM105.7m (-13%) came in below our expectation at 60%, but appears to be in line with the consensus at 71% of full-year estimate. Our negative variance was due to the lower-than-expected gross profit margin and higher-thanexpected effective tax rate. This was despite a better festive season sales contribution. A 4th interim DPS of 2.5 sen and a special DPS of 1.5 sen were declared for the quarter, bringing FY19 DPS to 11.5 sen, as expected.

YoY, 9M19 CNP declined by 13%, mainly dragged down by: (i) lower GP margin by 1.9ppt to 39.3% from 41.2% in 9M18 due to unfavourable merchandise mix and inventories written off (particularly from its overseas unit), and (ii) higher effective tax rate of 27.5% (9M18: 23.9%) from higher non-deductible expenses. This was despite improvement in revenue (+6%), from stronger festive season sales contributions from both year-end Christmas and Chinese New Year festivities as well as better allocation of operating expenses at 28.5% (9M18:28.8% of sales), from the closure of underperforming stores and better staff cost management.

QoQ, 3Q19 CNP plunged 35%, mainly dragged down by: (i) higher operating expenses allocation of 28% (2Q19: 26% of sales) from oneoff staff performance bonus pay-out, (ii) lower GP margin by 3.2ppt to 37.5% from 40.7% in 2Q19 due to unfavourable merchandise mix and inventories written-off, and (iii) higher effective tax rate of 26.5% (2Q19: 26.4%) from higher non-deductible expenses. This was despite improvement in revenue (+3%), from the better CNY festive season sales.

Outlook. We still believe that upcoming 4Q19 sales will be boosted by Hari Raya Aidilfitri shopping to match our latest earnings expectation. Padini is looking for an improvement in SSSG and cost allocation, as 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.

Cut FY19-20E CNP by 14-6%. We cut our FY19E and FY20E earnings by 14% and 6%, respectively, to reflect the lower-than-expected gross profit margin and higher-than-expected effective tax rate.

As such, we cut our TP to RM4.00, from RM4.25 based on an unchanged FY20E PER of 14x, at its 5-year forward historical mean PER. Downgrade to MARKET PERFORM from OUTPERFORM. Note that, the share price has surged 14% after our last upgrade to OUTPERFORM.

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

Source: Kenanga Research - 29 May 2019