Padini’s CFO, Sharon Sung, shed some light into its 4QFY20 results indicating the onset of a gradual recovery in footfalls post-MCO albeit with still tepid demand from tourist- concentrated city stores, off-set by positive recovery from suburban malls. With the MCO in the rear view, we expect Padini to chart a gradual recovery starting 1HFY21 (July - Dec 2020), with a part of the 1QFY21 already supported by Hari Raya Aidiladha sales, while 2QFY21 is expected to be boosted by the usual festivities sales (i.e. year-end, Christmas, and early CNY shopping spree). Upgrade to OP from MP with a higher TP of RM2.90 (from RM2.15) based on higher targeted PER of 16x, +1SD (from 12x, mean) on FY21E EPS.

Same-Stores-Sales (SSSG) gradually recovering post-MCO. Padini CFO, Sharon Sung, shed some light into the 4QFY20 results performance indicating a gradual recovery in footfalls post-MCO with still tepid demand from the tourist-concentrated city stores (i.e. KLCC and Fahrenheit 88) off-set by positive recovery from suburban malls (such as in Shah Alam, Penang, Johor). Nonetheless, the recovery of footfalls is still below the same period last year due to social distancing regulation which limits the number of customers into the stores at a given time, resulting long queues, concurrently limiting its SSSG recovery. On average, FY20 SSSG was -25%, with 4QFY20 SSSG at -66%. On the other hand, the contraction in gross profit margin was due to aggressive price discounts after the MCO was lifted in an attempt to attract consumers to their stores, as well as higher inventory written down during the MCO.

Expecting gradual recovery starting 1HFY21. We expect Padini to chart a gradual recovery starting 1HFY21 (July - Dec 2020), with a part of the 1QFY21 already supported by Hari Raya Aidiladha sales, while 2QFY21 is expected to be boosted by the usual festivities sales (i.e. year- end, Christmas, and early CNY shopping spree). We also believe that its gross profit margin would be able to recover to a comfortable level of 38% (from 4QFY20 of 31%) with a better promotion strategy and lower inventory loss with the full quarter sales. Some of the MCO rental rebates will be recognized starting July 2020 after reaching better agreement with landlords (estimated half already recognized in June 2020). On the other hand, Padini plans to close a few stores which have reached the end of their tenancy agreements and currently under monthly renewals. Note that, Padini still maintains the supply production diversification of 70% from China, 25% from Malaysia and 5% from other countries (e.g. Bangladesh, India, Cambodia and Korea). Furthermore, Padini online presence is still less than 1% of total revenue (less than RM1m) and it is currently looking for a suitable tie-up to better tap into the “new normal” consumer behaviour.

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).

Upgrade to OP from MP with a higher TP of RM2.90 (from RM2.15). With a 2-year CAGR of 37%, we believe that PADINI should be traded at a higher valuation level of 16x at +1.0SD of 5-year mean fwd. PER (from PER of 12x at 5-year mean). Upgrade to OP from MP with a higher TP of RM2.90 based on 16x FY21E EPS (from RM2.15, based on PER of 12x).

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

Source: Kenanga Research - 3 Sep 2020