FY19 CNP of RM156.5m (-12%) came in within our/consensus expectation at 101%/107% of full-year estimates. We introduced FY20E CNP higher by 13%. The worst for Padini appears to be over. PADINI’s share price has plunged 18% since our last downgrade to MP and we believe that much of the negatives have been priced in at this juncture. With Fwd. 2- year CAGR of 16%, we upgrade the stock to OP from MP with unchanged TP of RM3.75 based on 13x FY20E EPS.

FY19 within expectations. FY19 CNP of RM156.5m (-12%) came in within our/consensus expectation at 101%/107% of full-year estimates. 1st interim DPS of 2.5 sen, for FY20, was declared for the quarter, as expected. Recall that, a 4th interim DPS of 2.5 sen and a special DPS of 1.5 sen were declared in the last quarter, bringing FY19 DPS to 11.5 sen.

YoY, FY19 CNP declined by 12%, mainly dragged by: (i) lower GP margin by 1.9ppt to 39.1% from 41.0% in 1H18 due to unfavourable merchandise mix and inventories written off (particularly from its overseas unit), and (ii) higher effective tax rate of 27.0% (1H18: 25.6%) from higher non-deductible expenses. This was despite improvement in revenue (+6%), from stronger festive season sales contribution and higher SSSG of 4% compared to FY18 of -2%, from the closure of underperforming stores.

QoQ, 4Q19 CNP rose 61% mainly from: (i) stronger turnover (+9%) on Hari Raya Aidilfitri festive season sales, (ii) lower operating expenses allocation of 26% (3Q19: 28% of sales) compared to one-off spike in 3Q19 from staff performance bonus pay-out, (iii) improved GP margin by 1.2ppt to 38.7% from 37.5% in 3Q19 from better merchandise mix and absence of inventories written-off, and (iv) lower effective tax rate of 25.8% (3Q19: 26.5%) from lower non-deductible expenses.

Outlook. We like the stock for: (i) its resilient business models, focusing on the value-for-money segment through its Brands Outlet stores, and (ii) expected improvement in its SSSG and cost allocation. For FY20, the group will not be opening more than 10 outlets in 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.

PADINI share price has plunged 18% since our last downgrade to MP call and we believe that much of the negatives have been priced in at this juncture. Upgrade to OP from MP with the unchanged TP of RM3.75 based on an unchanged 13x FY20E EPS (at its 5-year forward historical mean PER).

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

Source: Kenanga Research - 28 Aug 2019