KEY INVESTMENT HIGHLIGHTS

• 1QFY20 earnings came in at RM19.6m (+9.2%yoy) which is within our and consensus’ expectations

• Sales rose marginally by +2.5%yoy as no additional stores was opened during the quarter

• First time implementation of MFRS 16 put a drag on earnings

• Second interim dividend declared of 2.5sen per share

• Maintain SELL with an unchanged TP of RM2.86

Earnings within expectations. Padini Holdings Bhd’s (Padini) 1QFY20 earnings came in at RM19.6m (+9.2%yoy), which is within ours and consensus’ expectations, accounting for 13.0% and 11.5% of full year FY20 earnings forecasts respectively. Note that in the past three financial years, 1Q accounts for about 15.0% of full year earnings.

No new store was opened during the quarter. Revenue for 1QFY20 increased marginally by +2.5%yoy to RM338.0m. The increase was contributed by the slightly improved same stores sales growth (SSSG). During the quarter, SSSG was +1.0%yoy higher than the prior corresponding quarter. Note that there was no additional store opened during the quarter.

The implementation of MFRS16 put a drag on earnings. The group has started to adopt the new accounting standard on leases i.e. MFRS 16 from 1st July 2019 onwards. Consequently, 1QFY20 earnings was dragged by about RM4.8m as Padini’s business model heavily dependent on operating leases. We expect a similar drag to earnings in the subsequent quarters.

Second interim dividend declared. The group has declared its 2nd interim dividend of 2.5sen per ordinary share (single tier) for FY20. This brings its cumulative dividend to 5.0sen which is of the same quantum as in FY19.

Target price. We maintain our target price at RM2.86 per share. 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 challenging business condition and subdued 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.

Source: MIDF Research - 28 Nov 2019