KEY INVESTMENT HIGHLIGHTS

• 9MFY20 earnings came in at RM55.8m (+4.9%yoy) which is below our and consensus’ expectations

• Sales significantly affected by Covid-19

• Earnings forecast cut by 29.3%/8.8% for FY20E/FY21F

• Holding back on dividend announcement

• Maintain NEUTRAL with an adjusted TP of RM2.61

Earnings missed expectations. Padini Holdings Bhd’s (Padini) 3QFY20 earnings came in at RM16.6.0m (-52.0%yoy), bringing its cumulative 9MFY20 earnings to RM92.0m (-13.0%yoy). The profit registered was below our expectations at 61.3% of full year FY20 forecast and largely within consensus’ 71% of full year FY20 earnings forecasts respectively.

Sales significantly affected by Covid-19. Revenue for 3QFY20 dropped by -26.8%yoy and -29.9%qoq to RM347.3m due to the movement control order (MCO), which forces Padini to halt its operations as its businesses are deemed non-essential. Earnings are also adversely affected by the MFRS 16 leases. As a result, net profit plunged -52.0%yoy to RM16.6m Sequentially, net profit fell -70.2%qoq due to the Covid-19 pandemic and bonus payment made during the quarter.

Earnings forecast cut by 29.3%/8.8% for FY20E/FY21F as we take into consideration of a more cautious consumer sentiment amid the Covid-19 pandemic. Besides consumer sentiment, Covid-19 will also have an effect on; (i) sales as consumers would have switch to online fashion platforms that are operating during the movement control order (MCO) especially before the Raya festive season, and (ii) cost as Covid- 19 has affected the supply chain of its products, which may lead to an increase in costing. However, the reopening of businesses in early May just before Raya, may help to recoup some loss sales previously. Moreover, there may be a pent up demand when consumer sentiment improves as Padini’s products are positioned at accessible price points.

Holding back on dividend announcement. Contrary to the 4.0sen dividend (2.5 sen interim and 1.5 sen special dividend) announced the past four financial years, the group did not announce any dividend for the quarter. We think that the company will focus on preserving cash in face of the uncertainties that impacts its business. That said, we believe that it may resume the dividend payout when there is more clarity for the business outlook. This will be supported by its net cash of RM449.8m and strong operating cash flow. We expect another dividend for this financial year albeit at a smaller quantum. As such, our DPS assumption is now 8.0 sen from 10.0 sen previously.

Source: MIDF Research - 28 May 2020