INVESTMENT HIGHLIGHTS

• 3QFY19 same-store-sales growth registered a positive growth of +4.0%yoy

• Nonetheless, a higher cost of inventory sold led to a lower profit margins

• As competition intensifies in the fast fashion industry, we view that there is little room for upward price revision

• The adoption of MFRS 16 is expected to have a negative impact on earnings

• Downgrade to SELL with a revised TP of RM3.02

Competition intensifies in the fast fashion industry. Post briefing, we opine that Padin Holdings Berhad (“Padini”) could face near term challenges and therefore, we are less optimistic on the prospect of the group. While revenue continues to grow at a healthy rate driven by better volume, a higher cost of sales led to lower profit margin. In the current economic climate, coupled with the heightening competition in the fast fashion segment, customers are becoming more price-sensitive. As such, the group has to be mindful in revising the product prices in order to protect their market share, unfortunately, at the expense of the profit margins.

Margin declined despite uptrend in SSSG. To recall, 3QFY19 revenue grew by +11.5%yoy due to the contribution of additional four new stores. Meanwhile, there was not much changes in the average spending per transaction. Driven mostly by a higher volume, we gathered that the same-store-sales growth (SSSG) is in an uptrend since the beginning of FY19. As of 3QFY19, SSSG is at +4.0%. Nonetheless, cost of sales grew by +20.2%yoy, in-tandem with the higher cost of inventory. Note that the higher inventory cost was due to the inclusion of sales tax as it was purchased post 1st September 2018. While the rate of growth in SSSG is encouraging, it is insufficient to cover the rising costs.

The adoption of MFRS16 will drag earnings. As the group’s financial year end is in June, the group will only start to adopt the new accounting standard on leases i.e. MFRS 16 from 1st July 2019. The management is currently in the process to quantify the impact from the adoption. Nonetheless, we are expecting a negative downward impact on earnings as Padini’s business model heavily rely on operating leases.

Source: MIDF Research - 7 Jun 2019