9MFY20 CNP of RM92.0m (-12% YoY) came in within our/consensus expectation at 70%/71% of full-year estimate. The stock has performed well since our last strategy report with the share price surging 33%. As such, we downgrade it to MP but with a higher TP of RM2.65 (from OP; TP: RM2.40) as we roll over the valuation base to FY21E EPS (from FY20E EPS) on 12x PER. Near-term sales could be boosted by pent-up demand post-MCO but we expect cautious consumer spending ahead due to prolonged pandemic uncertainties.

9MFY20 within expectations. 9MFY20 CNP of RM92.0m (-12% YoY) came in within our/consensus expectation at 70%/71% of full-year estimate. There was no dividend proposed for the quarter, below expectation, leaving the YTD-FY20 DPS at 7.0 sen.

YoY, 9MFY20 CNP decreased 12%, from lower sales (-7%), due to business closure in 3QFY20 with the enforcement of Movement Control Order (MCO) starting 18th March 2020 till 4th May 2020. Correspondingly, PBT margin contracted by 0.8ppt to 10.7% from 11.5% in 9MFY19, with higher operating expenses allocation of 30% (9MFY19: 29% of sales), from bonus payment in 3QFY20 and the impact of implementation of MFRS 16 Leases. Note that, the expansion in GP margin by 1.7ppt to 41.0% from 39.3% in 9MFY19 was from lower discounting promotion in tandem with the business closure.

QoQ, 3QFY20 CNP plunged 70%, affected by the implementation of the MCO which restricted business operations, resulting in lower sales (-30%). Correspondingly, PBT margin contracted by 8.3ppt to 6.9% from 15.2% in 2QFY20, with higher operating expenses allocation of 36% (2QFY20: 24% of sales), especially from bonus payment in current quarter and higher inventory holding costs. Note that, the expansion in GP margin by 2.6ppt to 42.7% from 40.1% in 2QFY20 was from lower discounting promotion in tandem with the business closure.

Outlook. Padini’s strategies include: (i) adopting a resilient business model, focusing on the value-for-money segment through its Brands Outlet stores, (ii) not opening more than 10 outlets in the local market to streamline cost allocation towards strategic locations, and (iii) expanding regionally through own-managed stores to strategically control stores’ value which include Cambodia (1 BO & 2 PADINI stores), and Thailand (7 Vincci stores). Note that, all its Malaysian outlets were closed for business from 18th March 2020 to 4th May 2020, while its Thailand outlets were closed from 22nd March 2020 to 16th May 2020. Most of the Malaysian outlets have resumed business on 5th May 2020 under the Conditional MCO (CMCO).

The stock has performed well since our last strategy report with the share price surging 33%. As such, we downgrade it to MARKET PERFORM (from OUTPERFORM), but with a higher TP of RM2.65 (from RM2.40) as we roll over the valuation base to FY21E EPS (from FY20E EPS) based on unchanged PER of 12.0x (5-year mean Fwd. PER). Near-term sales could be boosted by pent-up demand post-MCO; however, we expect cautious consumer spending ahead with prolonged uncertainties from the pandemic.

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

Source: Kenanga Research - 28 May 2020