We  caught  up  with  Padini’s  management  recently  for  an  update. Maintain NEUTRAL with a lower TP of MYR1.56 (9.0% upside), based on a 11.5x CY15 earnings P/E  (from 14x).  In its strategy,  earnings growth would  be  mostly  underpinned  by  its  Brands  Outlet  (BO)  expansion.However,  we believe  that  its growth would be  dampened by  softening consumer sentiment and a competitive operating environment.

Still expanding.  Padini is adding six  Padini Concept Stores  (PCS)  and six Brands Outlet (BO) stores in 2015,  which will be located in upcoming new  malls  like  Kota  Kinabalu  Imago  Mall,  Sunway  Putra  Mall,  and Sunway Velocity Mall amongst others. We are positive on the expansion plan as it would  lift Padini’s topline. However, we are also  cognisant of the  margin  pressure  on  Padini,  as  the  company  is  incurring  higher marketing expenses to stimulate demand.  

Somber  retail  landscape.  We  remain  cautious  on  the  challenging outlook for the retail sector in 2015, with consumers having to face rising inflationary  pressure  from  the  rationalisation  of  subsidies  and  the implementation  of  the  goods  and  services  tax  (GST)  in  Apr  2015.  We continue to expect sales growth to cool down for the rest of 2015, due to prudent  spending  by  consumers  –  particularly  on  discretionary  items.This  is  backed  by  RHB  economists’  projection  of  slower  consumption spending growth in 2015, at 5.2% YoY (2014F: 6.8% YoY).  

Forecasts.  As  we  become  more  wary  of  the  softening  consumer sentiment  going forward, we trim  our FY15F/FY16F/FY17F earnings by 4.0%/6.8%/6.9%.  We  expect  Padini  to  continue  its  aggressive  sales campaigns  in order to maintain its dominant market  position  in the more competitive  environment  –  which  in  turn  would  impact  margins  and earnings. 

Still  NEUTRAL.  Post  earnings  adjustment,  our  FY15F  earnings  would dip  by  2.7%  YoY  (vs  1.2%  growth  previously).  In  view  of  the  slowing earnings growth,  we  have re-pegged the stock to its average historical P/E of 11.5x (vs 14x previously). We remain NEUTRAL, but drop our TPto  MYR1.56 (9.0% upside). Although Padini’s dividend yield of 6.3-7.4% seems  appealing,  we  advise  investors  to  be  cautious  as  market conditions are volatile at the moment. 

Source: RHB