Improved 2QFY20 performance on year-end Christmas, and early CNY shopping sprees, boosted by the new Disney-theme apparels line which improves gross profit margins given its higher pricing point, while regional expansion in Indonesia could potentially be realised in the next 2-3 years. BUY with a TP of RM4.00 based on 15x FY20E EPS. We like the stock for: (i) its resilient business model, focusing on the value-for-money segment through its Brands Outlet stores, and (ii) expected improvement in its same store sales growth (SSSG) and cost allocation.

We expect Padini to report a better 2QFY20 (Oct - Dec 2019) on festivities sales (i.e. year-end, Christmas, and early CNY shopping spree), boosted by the new Disney theme apparels line. Note that 1QFY20 was weak due to the absence of festivities, which was worsened by the adverse impact of the maiden implementation of MFRS 16 (the impact which reduced PBT by RM4.8m in 1QFY20).

A 2-year collaboration with Disney which started in November 2019 to sell Disney theme apparels is expected to improve gross profit (GP) margins with higher pricing points compared to other brands. Sales of these Disney lines have exceeded the target set by Disney itself within a short time frame and Padini expects to secure more Disney characters to diversify the collection.

As of 30th June 2019, Padini has 40 foreign outlets managed as a franchise and dealership under the Vincci label which contributed less than 4% of group revenue, and Padini will continue to pare down its underperforming franchisees. With the strong brand-base built over the years, Padini has selected Phnom Penh, Cambodia for its first in-house outlets venture with three new stores opened in FY18 (1 BO & 2 PADINI stores) and has taken over seven Vincci Stores in Thailand in FY19.

From our observation, Indonesia which accounted for the most footfalls among Padini stores, may be earmarked as its next regional expansion target. The Indonesian Vincci franchisee agreement will expire in the next 2-3 years which may open up the possibilities of expansion there (currently, the franchisee owned 14 Vincci stores there). As of 30th October 2019, Padini has net cash position of RM446.0m, with capex of RM20m/year which should provide ample space for expansion.

Source: Rakuten Research - 20 Jan 2020