INVESTMENT HIGHLIGHTS

• 1QFY17 earnings lower by -10.2%yoy to RM28.6m

• Revenue however increased by +15.0%yoy to RM310m from new stores opened

• Gross profit and net profit margin on a decline

• But expect a seasonally stronger 3QFY17 (January-March)

• Second interim dividend for FY17 of 2.5sen was declared

• Maintain NEUTRAL with a revised TP of RM2.81 based on PER18 of 11.0x

Earnings in-line. Padini Holdings Berhad’s 1QFY17 earnings declined by -10.2%yoy to RM28.6m. Despite 3MFY17 earnings only accounting for 19.5% and 18.8% of our and consensus full year earnings forecasts respectively, we are expecting a seasonally stronger 3QFY17 (JanuaryMarch), as this period coincides with the Chinese New Year celebrations.

1QFY17 revenue increased by +15.0%yoy. Revenue for 1QFY17 however, increased by +15.0%yoy to RM310m mainly attributable to the five new Padini Concept Stores and nine Brands Outlet stores that were fully operational during the quarter.

Gross profit and net profit margin on a decline. Despite the +3.1%yoy increase in gross profit to RM128.6m in 1QFY17, its gross profit margin for the period shrunk by -4.8ppts from 46.2% in 1QFY16 to 41.5%. In addition, there is a slight decreased to net profit margin of -2.6ppts from 11.8% in 1QFY16 to 9.2%. The compression in profit margins were mainly due to higher costs, sales events held during the quarter coupled with rising selling and distribution expenses.

Second interim dividend declared. A second interim single-tier dividend of 2.5sen per share was declared for FY17. This will bring the cumulative dividends declared per share for FY17 to 5.0sen per share.

Prospect. Despite the challenging economic environment, Padini has planned to open at least seven stores in FY17 (with Brands Outlets stores will be the most stores open). We believe that this is the correct strategy given that Brands Outlets stores target value-for-money segment which will cater for mass market needs in this tough business environment.

Source: MIDF Research - 28 Nov 2016