KEY INVESTMENT HIGHLIGHTS

• No new physical store expansion expected in FY21

• Preserving cash for rainy days

• Tenants’ market may bode well for operating costs

• Inventory for 3QFY21 to match previous year

• Maintain NEUTRAL with an unchanged TP of RM2.48

No new physical store expansion expected in FY21. We attended Padini’s 1QFY21 post results briefing sensing that management is still in a cautious mode in its near-term outlook albeit with some pockets of opportunities. Notably, the growth in its online sales is not enough to offset the decline in footfall to its stores. Online sales contributed less than 1% to the group’s topline. That said, management plans to further improve on its digital exposure. Offline, the company will be reviewing and closing some of its non-performing stores. We do not expect the closure of the non-performing stores to affects its top and bottomline due to the minimal contribution from these outlets.

Preserving cash for rainy days. Padini has held back its dividend payment since 3QFY20 (end-May 2020) to preserve cash in the event of a possibly worsening business landscape. This mark the third consecutive quarter where the company held back its usual quarterly dividend payment. As a result, its cash pile has improved further to RM512.9m in 1QFY21 from RM441.5m in 4QFY20. Operating cashflow is also healthy at RM108.6m. Hence, we believe that the dividend payment is likely to occur when there is more certainty on its business outlook and make no changes to our 8.0sen DPS for the full year.

Tenants’ market may bode well for operating costs. During 1QFY21, the company benefited from lower rental expenses due to the rental rebates and waivers provided by its landlords. However, these rental benefits are deemed one-off or temporary. We believe that landlords will be more selective in providing assistance to their tenants as footfall recovers. We also understand that many landlords are increasing the turnover rental ratio as opposed to the fixed rent rates previously when negotiating with tenants. Less than 10 of Padini’s leases are up for renewal in FY21 and the company may be able to save on rental costs if they are able to negotiate better terms for the renewals.

Inventory for 3QFY21 to match previous year as the quarter is seasonally stronger due to the Chinese New Year celebration. This is in anticipation of a potential recovery in sales. However, it expects a more subdue year end sales season this year compared to last year due to the rise in Covid-19 cases since October. Klang Valley outlets, which typically contribute to a high portion of its sales, are likely to be adversely impacted by the conditional movement control order as shoppers are still wary about visiting the malls.

Focus on regaining business strength locally before expanding overseas. The group has also ceased its operations in Indonesia as it mutually terminates its franchise agreement with its franchisee there since end of September. There were 8 stores in operation there. Moving forward, the group may consider re-enter the market after the business condition in Malaysia stabilises.

Maintain NEUTRAL with an unchanged TP of RM2.48. We make no changes to our earnings estimates and TP following the briefing. While we expect the company’s prospects to improve next year, we are still cautious of the growth for Padini’s business. Notably, Retail Group Malaysia expects fashion and fashion accessories segment to decline 24.2% in 4QCY20 and expects retail sales to remain challenging in 2021 with a growth rate of 4.9%. Our TP is based on unchanged 13.5x PER pegged to FY22F EPS of 18.4 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 shift in consumer behaviour.

Source: MIDF Research - 9 Dec 2020