1HFY20 CNP of RM75.4m (+6% YoY) is within consensus at 47%, but below our expectation at 43% on higher-thanexpected net impact from the implementation of MFRS 16. We cut FY20-21E CNP by 9-8% to recognize the higher-thanexpected net impact of MFRS 16 as well as Covid-19 outbreak effect on 3QFY20 sales. As such, we cut our TP to RM3.70 (from RM4.00) based on unchanged 15x FY20E EPS. Maintain OP as we expect a recovery in 4QFY20 from pent-up demand suppressed by the outbreak and the usual Hari Raya sales.

1HFY20 below our expectation. 1HFY20 CNP of RM75.4m (+6% YoY) is within consensus at 47%, but below our expectation at 43% on higher-than-expected net impact from the implementation of MFRS 16. A 3rd interim DPS of 2.5 sen was declared for the quarter, bringing the YTD-FY20 DPS to 7.0 sen, as expected.

YoY, 1HFY20 CNP rose 6%, boosted by: (i) higher sales (+5%) especially driven by 4QCY19 year-end sales promotion and four new stores opening, and (ii) lower effective tax rate of 26.1% (1HFY19: 28.0%). This was despite the net reduction in PBT by RM9.3m with the implementation of MFRS 16 and contraction in GP margin by 0.2ppt to 40.2% from 40.4% in 1HFY19 from discounting promotion.

QoQ, 2QFY20 CNP soared 185%, buoyed by: (i) stronger sales (+47%) mainly due to Christmas season, year-end school holidays and the nationwide 5-day special sales promotion, (ii) a boost in PBT margin by 7.2ppt to 15.2% from 8.0% in 1QFY20, with lower operating expenses allocation of 24% (1QFY20: 32% of sales) as 1QFY20 was affected by the increase in operating costs to sustain sales (due to absence of festivities), and (iii) lower effective tax rate of 25.8% (1QFY20: 27.0%). This was despite contraction in GP margin by 0.4ppt to 40.1% from 40.5% in 1QFY20 from the discounting promotion.

Outlook. We like the stock for: (i) its resilient business model, 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. We understand that the new, slower expansion plan is to streamline the operational cost towards strategic locations, while expanding regionally through own-managed stores to strategically control stores’ value which include Cambodia (1 BO & 2 PADINI stores), and Thailand (7 Vincci stores).

Cut FY20-21E CNP by 9-8%. We cut FY20-21E CNP by 9-8% to recognize the higher-than-expected net impact of MFRS 16 implementation as well as impact of Covid-19 outbreak on 3QFY20 sales.

Maintain OP with a lower TP of RM3.70 (from RM4.00) based on unchanged 15x FY20E EPS (at +1.0SD of 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 - 27 Feb 2020