INVESTMENT HIGHLIGHTS

• 3QFY17 earnings dipped by -0.9%yoy to RM34.8m

• Revenue increased by +9.2%yoy to RM373.7m

• Gross profit margin and net profit margin declined

• The decline in margins were due to higher operating costs

• Downgrade to NEUTRAL with an unchanged TP of RM2.98 based on a PER18 of 11x

Earnings met our and consensus expectations. Padini Holdings Berhad’s 3QFY17 earnings dipped marginally by -0.9%yoy to RM34.8m. Nevertheless, 9MFY17 cumulative earnings met our and consensus full year FY17 expectations, accounting for 73.9% and 76.2% of full year forecasts respectively assisted by the strong performance in the previous quarter.

3QFY17 revenue increased by +9.2%yoy. Revenue for 3QFY17 increased by +9.2%yoy to RM373.7m mainly attributable to the; (i) positive same store sales growth (SSSG); (ii) outstanding performance of Brand Outlet, PDI and Vincci and; (iii) opening of 13 new stores which consist of seven Brands Outlet, five Padini Concept and one free standing stores. Approximately RM32m or 2.9% of total revenue were contributed from the opening of the 13 new stores from the period Nov 16 to Feb 17.

However, gross profit and net profit margin declined. The gross profit margin for 3QFY17 decreased by -0.5ppts yoy to 41.1%. Nevertheless, the gross profit grew by +7.8%yoy to RM153.5m in 3QFY17 due to higher revenue recorded. However, the net profit in 3QFY17 reported a decline of -0.9%yoy to RM34.8m which resulted in net profit margin declining -0.9ppts yoy to 9.3%.

The decline in margin was due to higher operating costs. The decline in net profit margin was due to the rise in marketing staff cost. This resulted in higher selling and distribution expenses which increased by +12.3%yoy to RM87.3m. In addition, the administrative expenses rose by +15.1%yoy to RM21.3m in line with the increase number of stores in operation this quarter.

Prospect. Despite a relatively weaker 3QFY17, Padini managed to conclude a commendable result for its 9MFY17 despite the prevailing challenges of unstable Ringgit, rising costs of goods and operations. We expect that 4Q (AprilJune) results will be stronger, driven by earlier celebration of Hari Raya Puasa (25 June 2017) in FY17.

Downgrade to NEUTRAL with an unchanged TP of RM2.98. Since our BUY call in the previous report, the share price has surged by +28%, exceeding our TP of RM2.98. We think that the current valuation is fair and has factored in Padini’s positive near term growth. Hence, we downgrade our recommendation to NEUTRAL with an unchanged TP of RM2.98. Our valuation is based on EPS18 of 27.1sen against the company’s two-year average PER of 11x.

Source: MIDF Research - 31 May 2017