KEY INVESTMENT HIGHLIGHTS

• Achieving sales is key

• May gain market share from market consolidation and consumer downtrading

• Gross profit margin expected to be stable while operating cost should stabilise

• Maintain NEUTRAL with an unchanged TP of RM2.09

Achieving sales is key. We attended Padini’s virtual briefing yesterday. From that we had a feeling that the worst is over but recovery is dependent on revival in consumer spending. Management shared that July sales had improved due to the Hari Raya Haji celebration but saw sales in August weakened compared to July. As the RMCO is extended until end of the year, we expect store capacity to remain limited, which may cap the rate of recovery. Topping that, online and digital platform sales has not grown to a significant level to offset the lower capacity at stores. Another limiting factor is sales from tourists as that makes up 30% to 50% in outlet revenue for stores located in tourist hot spots such as Pavilion KL, Farenheit 88 and Suria KLCC. As such, we expect revenue in 1HFY21 to improve from a low base in 4QFY20 but softer than the comparable period one year ago. Note that same store sales growth for 4QFY20 plunged to -66%qoq.

May gain market share from market consolidation and consumer downtrading. The pandemic has forced weaker competitors to close down their businesses, which may lead to easing competition for Padini. On top of that, consumers may down trade to value for money brands like Padini from the more expensive brands for similar styles if they remain cautious with spending. That said, the fashion and fashion accessories segment is expected to be one of the most negatively affected sub-segment for retail sales according to data compiled by the Retail Group Malaysia. That means the overall absolute spending on the fashion and fashion accessories sub-segment may still be lower compared to last year.

Gross profit margin expected to be stable while operating cost should stabilise. On a brighter note is gross profit margin that is expected to remain in the high 30%, which bodes well for profitability. This is as supplier offered competitive pricing for stocks based on cash terms, which will translate into good gross profit margin for Padini. On the other hand, operating expenses should revert to previous levels as rental expenses are expected to normalised going forward compared to discounts given in 4QFY20. That said, rental rates should remain favourable in a tenant’s market.

Dividend may be withheld until clarity is seen. The company may also hold back from paying dividend until further clarity is seen and depending on the momentum of recovery and whether there may be a spike in cases, which may affect operations again. This is to preserve cashflow while the management wait-and-see until outlook stabilises. We maintain our 8 sen dividend payout for now and expect that to be paid at once instead of staggered when the business outlook is clearer.

Maintain NEUTRAL with an unchanged TP of RM2.09. We make no changes to our earnings estimates, our TP is based on unchanged PER of 13.5x pegged to FY21F EPS of 15.5 sen. The assigned PER multiple is -1.5SD below the group’s one-year average historical PER as we account for the challenging business condition and weak consumer sentiment. Dividend yield is estimated at 3.4%

Source: MIDF Research - 3 Sept 2020