INVESTMENT HIGHLIGHTS

• 9MFY18 earnings grew at a slower pace of +2.6%yoy as the group incurred higher cost from new outlets

• Interim and special dividend declared

• Expecting a strong 4QFY18 in view of Hari Raya festive and abolishment of GST

• Maintain NEUTRAL with an unchanged TP of RM4.77

Earnings in line with expectations. Padini’s 3QFY18 earnings came in at RM39.8m (+14.3%yoy). This lead to 9MFY18 earnings of RM121.0m. The results is in line with our and consensus expectations, accounting for 67.9% and 65.7% of full year FY18 earnings forecasts respectively. We expect stronger 4QFY18 earnings as in view of the Hari Raya festive. This will be further boosted by the abolishment of GST.

Lower returns from opening additional outlets. During the 9MFY18, Padini has opened a total of 12 new outlets comprised of six Padini Concept stores and six Brand Outlet stores. However, 9MFY18 earnings only grew by +2.6%yoy to RM121.0m. Despite aggressive outlet expansion, the revenue generated was insufficient to cover additional operating costs. Currently, the combined average same-store sales for Padini Concept and Brands Outlets contracted by -4.0%yoy.

Interim and special dividend declared. The Company has declared the 4th interim and special dividend of 2.5sen and 1.5sen per share. Cumulatively, 9MFY18 dividend amounted to 11.5sen per share.

Prospect. While Hari Raya spending and GST abolishment will provide temporary short term boost to sales, we expect that the outlook for the group to remain challenging. This is as new outlets are expected to take longer period to break even due to the crowded local retail landscape. In 2018, it is estimated that about 24 foreign brands has opened their 1st outlet in Malaysia. Among the foreign brands, we view that Max Fashion, which positioned themselves as value fashion brand, would pose as the greatest threat to Padini.

Maintain NEUTRAL with unchanged TP of RM4.77. We are maintaining our NEUTRAL stance on Padini with an unchanged target price of RM4.77 based on 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 - 24 May 2018