Padini’s FY13  results  were  in  line  with  consensus  and  our  estimates. Revenue  grew  by  8.8%  y-o-y  but  earnings  dipped  by  10.4%  due  to:  i) lower  gross  profit  margin  as  consumer  preference  shifted  to  products with lower mark-ups, and ii) higher operating expenses from new stores openings.  We like the group’s aggressive outlet expansion plans  and decent dividends. Upgrade to BUY, with an unchanged FV of MYR1.95.  

- Within  expectation.  FY13  revenue  increased  by  8.8%  y-o-y  to MYR789.8m,  from  MYR726.1m,  mainly  attributable  to  new  store openings. However, its net profit declined by 10.4% y-o-y to MYR85.4m (from  MYR95.3m)  as  higher  cost  of  sales  (+12.3%  y-o-y)  and  higher operating  expenses  (+13.8%  y-o-y)  to  set  up  the  new  stores  offset  the stronger  sales  generated.  Vis-à-vis  3Q13,  4Q13  turnover  and  earnings were lower by 13.2% and 36.7% q-o-q respectively as 3Q’s performance was boosted by Chinese New Year sales.  

- Margins  under  pressure.  Gross  profit  margin  weakened  by  1.7ppt  to 46.7%  y-o-y,  no  thanks  to  the  higher  cost  of  goods  as  customers switched  to  more  value-for-money  items.  Likewise,  FY13  EBIT  margin slipped by 3.1ppt y-o-y to 15.1% due to higher operating costs from new store openings.

- 7 outlets coming on board. The momentum of new store openings will resume  in  1HFY14,  with  seven  new  outlets  in  the  pipeline.  Padini  also declared a 2.5 sen DPS first interim dividend for FY14, on track to meet our forecast of 10 sen DPS for the full-year.

- Forecasts. We  are  keeping  our  forecasts  given  the  in  line  results.  Key investment  risks  include  the  entry  of  new  retailers  into  the  market  and slower consumer spending.

- Upgrade  to  BUY. We  are  optimistic  on  the  outlook  of  Padini  due  to  its solid fundamentals and on-track outlet expansion. Our FV of MYR1.95 is based on 14x FY14 EPS. The stock is currently trading at a low forward P/E of 12x compared to its historical 15x P/E. Given its lucrative dividend yield of 6% and undemanding valuation, we upgrade our call to BUY.

Source: RHB