From a recent meeting, we gather that Padini’s earnings growth is gaining momentum from its aggressive outlet expansion. While the group is on track to pay a 10 sen/share dividend for FY14, we are expecting a better payout for FY15 if things turn out well. Downgrade to NEUTRAL (from Buy), with a new MYR2.15 FV (from MYR1.95).

• Back into the game. Padini’s FY13 numbers were weak, no thanks to only oneBrands Outlet(BO) store opening in the last financial year, and lower ASPs on aggressive bundling  promotions and discounts. We believe the worst could be over, as we expect the group to perform better in FY14-15 given its aggressive outlet expansion in the pipeline.
• On an expansion spree. Padini is on track to add three Padini Concept Stores (PCS) and four BO stores in FY14. It may open an additional BO outlet at AEON (AEON MK, NEUTRAL, FV: MYR15.60)’s Bukit Mertajam shopping mall this year too. We view this aggressive new store expansion positively, as it will lift Padini’s sales and earnings going forward. In response to changing consumer spending patterns, the group will focus on expanding its BO stores by targeting the lower spectrum of the retail market. Its closest peer, the Factory Outlet Store(FOS), has 55 stores nationwide vs BO’s 23. We see huge potential for Padini to penetrate into the value-for-money segment by expanding the number of BO stores.
• Possibly more dividends. The cash-rich group has declared a DPS of 7.5 sen YTD, which should meet our 10 sen DPS forecast for FY14. As we believe management will be more generous in dishing out FY15’s dividends, we are expecting a DPS of 13 sen for FY15.
• Downgrade to NEUTRAL. We lift our FY14-15 earnings forecasts by 3-5%, as we expect better margins on higher turnover from its new store expansion. Our FV is adjusted higher to MYR2.15 (from MYR1.95), based on its 2-year historical mean P/E of 14x, as we roll over our valuation to FY15 from FY14. As the stock is already trading at its historical 14x P/E, we deem the valuation fair. Downgrade to NEUTRAL (from Buy), given that the share price has appreciated 23.5% since our Aug 2013 upgrade. At the current price level, the stock still delivers a lucrative dividend yield of >5%.

Financial Exhibits

SWOT Analysis

Company Profile 
Padini is involved in the retailing of apparel, footwear and accessories.

Recommendation Chart

Source: RHB