INVESTMENT HIGHLIGHTS

• 2QFY18 earnings dropped by -8.3%yoy to RM50.0m

• Earnings impacted by higher costs

• Outlook remain challenging

• Maintain NEUTRAL with an unchanged TP of RM4.77

Earnings met our and but exceed consensus expectations. Padini’s 2QFY18 earnings came in at RM50.0m. This met our expectations but exceed consensus expectations, accounting for 46.0% and 58.0% of full year FY18 earnings forecasts respectively. Against last year, revenue increased by +7.9%yoy but earnings dropped of - 8.3%yoy respectively while on quarterly sequential basis, revenue and earnings increased of +46.1% and +60.1% respectively due to seasonally stronger quarter.

The 2QFY18’s earnings impacted by higher costs. Revenue for 2QFY18 increased by +7.9%yoy to RM460.4m. The increase was mainly due to the increased number of outlets for both Padini Concept Stores (PCS) and Brands Outlet (BO). Nevertheless, cost of sales and selling and distribution expenses increased at a higher pace of +12.4%yoy and +9.4%yoy respectively. This was mainly attributable to additional PCS and BO stores opened during the year. As a result, the quarterly earnings dropped of -8.3%yoy. On a sequential quarterly basis, 2QFY18 recorded a stronger performance as compared to 1QFY18, driven by the Christmas and year-end school holiday season sales.

Future prospect. We expect that the outlook for the group to remain challenging in the coming quarters due to the increasing competition in the local fashion segment. Nevertheless, the additional plan opening of 12 new stores locally and three outlets in Cambodia in FY18 will sustain growth trajectory.

Maintain NEUTRAL with unchanged TP of RM4.77. We are maintaining our NEUTRAL stance on Padini with an unchanged target price of RM4.77. Our target price changes as we rolled forward our valuation based to FY19F with a PER of 15.5x pegged to EPS19 of 30.8sen. We view that the valuation is currently stretched at this juncture with a forward PER of close to 20.0x in comparison to the average historical two-year PE of 15.0x

Source: MIDF Research - 27 Feb 2018