3QFY15 results met our/consensus estimates, with earnings improving 26% YoY to MYR26.6m, partly contributed by stronger sales in 3Q. We upgrade Padini to NEUTRAL (from Sell) with a lower TP of MYR1.26 (7% downside), as we believe the negatives have been priced in. We further trim our FY15-16 EPS forecasts, as we expect weaker consumer spending in the next 6-9 months.

Growth in sales and earnings. Padini’s 3QFY15 (Jun) revenue rose 29.6% YoY to MYR283.6m, mainly driven by stronger same-store sales growth (SSSG) in 3Q at both Padini Concept Stores (+23.3% YoY) and Brands Outlet (+19.7% YoY). Meanwhile, 3QFY15 EBIT margin expanded to 14% (+90bps YoY) due to fewer discounting activities during the quarter. Accordingly, net profit increased 26% YoY to MYR26.6m. Sequentially, 3QFY15 revenue improved by 15.5% due to the longer festive shopping season, while net profit increased 64.1%, reflecting the improved operating leverage.

Another dividend. A 2.5 sen fourth interim single-tier dividend was declared this quarter. This brings the total DPS declared YTD to 10 sen. We believe Padini will remain generous in paying out dividends in future, given its healthy cash flow. Moving forward, we forecast for a dividend yield of 6.3-7.1%, pegged to a payout ratio of 70-75%, based on management’s guidance.

Forecasts and risks. We further trim our FY15/FY16 EPS forecasts by 4.7%/2.2% respectively to reflect the challenging operating environment ahead, at least for the next two quarters. We foresee lower consumption spending following the implementation of the goods and services tax (GST) from Apr 2015. Key risks include an unfavourable shift in consumption trend and increasing competition.

Upgrade to NEUTRAL. Following our earnings revision, we pare our TP to MYR1.26 (from MYR1.30, 7% downside), pegged to an unchanged 11.5x 2015 P/E. However, we upgrade our call to NEUTRAL (from Sell), given the recent share price retracement. Although Padini is offering a reasonable 6.3% FY16 yield, we continue to see few re-rating catalysts for the stock in view of the tepid consumer market environment in the next 6-9 months.

SWOT Analysis

Company Profile

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

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Source: RHB Research - 20 May 2015