FY20 CNP of RM75.2m (-52%) came in below our/consensus expectation at 57%/72% due to lower-than-expected margin on price discounts to attract consumers. As such, we cut our FY21E CNP by 18% and our TP to RM2.15 from RM2.65. We expect Padini to continue ramping up promotional activities in the midst of cautious consumer spending and gradual recovery in footfalls post-MCO. Maintain MARKET PERFORM.

FY20 below expectations. FY20 CNP of RM75.2m (-52%) came in below our/consensus expectation at 57%/72% of full-year estimates due to lower-than-expected margin especially on aggressive price discounts to attract consumers. There was no dividend proposed for the quarter, which is below expectation, leaving FY20 DPS at 7.5 sen.

YoY, FY20 CNP plunged by 52% on lower sales (-24%). No sales were generated during MCO period from 18th March 2020 until 4th May 2020. Correspondingly, PBT margin contracted by 4.4ppt to 7.9% from 12.3% in FY19, dragged by higher operating expenses allocation of 31.5% (FY19: 28% of sales) to sustain idle operations during MCO, bonus payment in 3QFY20 and the impact of implementation of MFRS 16 Leases. Note that, the expansion in GP margin by 0.6ppt to 39.7% from 39.1% in FY19 was from lower discounting promotion in tandem with business closure.

QoQ, 4QFY20 CNP plunged into the red with core losses of RM16.8m, compared to core profit of RM16.6m in 3QFY20, affected by the implementation of the MCO which restricted business operations until 4th May 2020, resulting in lower sales (-50%). Furthermore, the group recorded higher operating expenses allocation of 43% (3QFY20: 36% of sales) to sustain idle operations during MCO as well as contraction in GP margin by 11.6ppt to 31.1% from 42.7% in 3QFY20 with aggressive price discounts after the MCO was lifted in an attempt to attract consumers to their stores.

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).

Cut FY21E CNP by 18% to factor in higher discount offers to entice consumers spending. Additionally, we also introduce FY22E CNP of RM139.0m (+17%).

Maintain MARKET PERFORM but with a lower TP of RM2.15 (from RM2.65) based on 12x FY21E EPS (5-year mean Fwd. PER).

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

Source: Kenanga Research - 27 Aug 2020