INVESTMENT HIGHLIGHTS

• 4QFY19 earnings declined by -4.9%yoy to RM54.4m, despite revenue came in higher at RM516.5m (+8.1%yoy)

• Profit margins contract to 10.5% from 12.0% a year ago

• First interim dividend of 2.5sen per share declared for 1QFY20

• Maintain Sell with a revised TP of RM2.86

4QFY19 earnings declined by -4.9%yoy. Padini Holdings Berhad’s 4QFY19 earnings declined by -4.9%yoy to RM54.4m while the full year FY19 earnings declined by -10.1%yoy to RM160.2m. The FY19 earnings slightly above our and consensus expectation, accounting for 106.0% and 107.0% of full year forecasts respectively.

4QFY19 revenue increased by +8.1%yoy. Revenue for 4QFY19 increased by +8.1%yoy to RM516.5m. The increase was partly contributed by the improved same stores sales growth (SSSG). During the quarter, SSSG was +6.0% higher than the prior corresponding quarter. Another reason for the improved performance was due to opening of four additional outlets bringing its total number of stores to 132 stores by June 2019.

Despite the revenue increase, margins contracted. The cost of sales increased at a faster rate than revenue resulting in gross profit (GP) margin declining by -1.5ppts yoy to 38.7%. The decline in GP margin is due to the group’s strategy to be very careful in revising product prices in order to protect their market share in spite of the pressures of rising costs. Meanwhile, PAT margin declined -1.4ppts yoy to 10.5% mainly contributed by the higher selling and distribution expense.

Interim dividend declared. The Company has declared the 1st interim dividend of 2.5sen per ordinary share (single tier) for FY20. This is of the same quantum as in FY19.

Impact to earnings. We maintain our FY20 earnings forecasts at this juncture.

Target price. We revised our target price to RM2.86 (previously RM3.09) as we rolled forward our valuation based year to FY21. The target price is based on pegging the FY21 EPS of 21.2sen per share to PER of 13.5x. The assigned PER multiple is -1.5SD below the group’s one-year average historical PER. This is to reflect the subdued business condition and consumer sentiment.

Maintain Sell. The local fast fashion industry has become increasingly competitive due to the: (i) rising average time spent per customer on online shopping; (ii) change in spending habit and purchase decision of consumers and; (iii) competition from foreign fashion companies. Coupled with subdued consumer sentiment, customers are becoming more price sensitive and less brand loyal. In order to protect its market share, we do not expect Padini to significantly revise its product prices. With the higher cost of inventories, this will result in compression in profit margins. In addition, due to the saturated local fast-fashion segment and challenging business condition, we do not expect a meaningful store expansion programme beyond FY19. All things considered, we maintain our SELL recommendation on the stock.

Source: MIDF Research - 28 Aug 2019