1H15  core  earnings  missed  expectations  again,  at  40%/36.9%  of our/consensus  estimates.  Given  the  retail  market’s  bleak  outlook,  we downgrade  our call to  SELL  with  a  lower MYR1.30  TP  (from MYR1.56,11.6% downside). We attribute the earnings miss to Padini’s aggressive sales  campaigns.  We  further  trim  our  FY15/FY16/FY17  earnings forecasts by 15.9%/16.5%/8.2% as we factor in the declining margins.

Hurt  by  lower margins  again.  Padini’s  1H15  (Jun)  revenue  improved by 4.6% YoY to MYR472.3m, mainly driven by same-store sales growth (SSSG) of 0.4% and 2.9% for  Padini Concept Stores (PCS)  and  Brands Outlet  (BO)  respectively.  However,  EBIT  decreased  34.3%  to MYR52.1m as its margin came in lower again at 11% (-660bps YoY) on its  ongoing  aggressive  promotional  and  discounting  activities.  All  in, 1H15  core earnings fell 36.8% YoY to MYR35.5m  due to the substantial contraction in its margins. Compared to 1Q15, 2Q15’s revenue improved slightly by 8.3% while net profit was lower by 15.8%.      

Third interim dividend.  Padini also declared  a  third  FY15 interim DPS of 2.5  sen. This brings total DPS declared YTD to 7.5  sen  –  in line withour estimates. Moving forward, we are forecasting for a dividend yield of 5.2-6.7%, pegged to payout ratio of 70-75%.  Although this  might seem appealing  to  investors,  we  are  more  concerned  over  potential  further margins compression in the near term.  

Forecasts and risks.  In view of the weak 1H15 numbers, we  lower  our FY15/FY16/FY17  EPS  forecasts  by  15.9%/16.5%/8.2%  respectively, factoring in higher opex assumptions.  The earnings revision reflects our cautious  stance  on  the  challenging  retail  sector  in  2015.  Key  risks  to earnings include faster-than-expected margins  recovery and favourable changes in consumer sentiment.

Divestment  case.  With  continued  earnings  disappointments  over  the last  few  quarters,  we  are  turning  more  wary  on  Padini’s  earnings prospects  in  the  coming  year.  Hence,  we  downgrade  our  call to  SELL (from  Neutral)  following  our  earnings  revision,  with  our  TP  trimmed  to MYR1.30 (from MYR1.56), based on an unchanged 11.5x 2015 P/E. The stock is currently trading at a  2015 P/E of 13x, which we deem slightly expensive relative to its 5-year historical mean P/E of 11.6x.

Source: RHB