KEY INVESTMENT HIGHLIGHTS

• 2QFY20 earnings came in at RM55.8m (+4.9%yoy) which is within our and consensus’ expectations

• Sales rose by +7.0%yoy due to the improved same stores sales growth

• The implementation of MFRS 16 put a drag on quarterly earnings by about RM4.5m

• Third interim dividend declared of 2.5sen per share

• Upgrade to NEUTRAL with an unchanged TP of RM2.86

Earnings within expectations. Padini Holdings Bhd’s (Padini) 2QFY20 earnings came in at RM55.8m (+4.9%yoy). This bring its cumulative 1HFY20 earnings to RM75.5m (+6.1%yoy) which was within ours and consensus’ expectations, accounting for 50.1% and 47.1% of full year FY20 earnings forecasts respectively.

Improvement in same stores sales growth. 2QFY20 revenue increased by +7.0%yoy to RM495.1m. The increase was contributed by the: (i) sales generated from four new stores that were opened in the 1HCY19 and; (ii) improvement in same stores sales growth (SSSG). Note that Christmas, year-end school holidays and the nationwide five days special sales promotion was held during the quarter.

The implementation of MFRS16 put a drag on earnings. The group had started to adopt the new accounting standard on leases i.e. MFRS 16 from 1st July 2019 onwards. Consequently, 2QFY20 and cumulative 1HFY20 earnings was dragged by about RM4.5m and RM9.3m respectively as Padini’s business model heavily dependent on operating leases. We expect a similar drag to earnings in the subsequent quarters.

Third interim dividend declared. The group has declared its 3rd interim dividend of 2.5sen per ordinary share (single tier) for FY20. This brings its cumulative dividend to 7.5sen 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.

Source: MIDF Research - 27 Feb 2020