PADINI Holdings Bhd’s dividend yield climbed close to 7% recently, but shareholders may not be too excited about it as the higher yield was a result of a slide in its share price over the last year.  

From a high of RM2 per share on April 15, 2014, the share price has dropped to RM1.45 last Wednesday. The decline in share price comes on the back of deteriorating earnings as the fashion retail company battles stiff competition while consumer sentiment remains weak.

It is worth noting that Padini (fundamental: 2.50; valuation: 0.90) has reported four consecutive quarters of earnings contraction since its third quarter ended March 31, 2014. However, despite lower earnings, it continued with its dividend payouts.

For the cumulative six months ended Dec 31, 2014, it declared two interim dividends of 2.5 sen per share each. As for the financial year ended June 30, 2014, shareholders were rewarded with dividends amounting to 11.5 sen per share, including a special dividend of 1.5 sen per share.

Nonetheless, the sustainability of Padini’s dividend payouts has come into question, given the challenging retail landscape going forward.

Analysts foresee Padini continuing to face margin compression as it presses on with its aggressive promotional activities to clear slow-moving stock before the implementation of the Goods and Services Tax (GST) on April 1.

Some analysts expect Padini’s margins to recover at the end of 1HFY2016. Others, however, are not so sure, given the more challenging environment.

In an email reply to The Edge, Padini says its gross margins for merchandise displayed before the implementation of the GST will contract as it will not be changing the prices post-GST, indicating that it will be absorbing the tax for those goods.  

“For merchandise offered for the first time after April 1, prices will be tweaked, where needed, so that we get to maintain our usual margins. But, we really do not know what the situation will be as a lot depends on how consumers react to the GST. It is very much a wait-and-see situation, and strategies will have to focus on the best way to react to the changed condition,” the company says.

 For the second quarter ended Dec 31, 2014, Padini saw its net profit decline 43% year on year to RM16.21 million. This came about despite a 5% growth in revenue. Gross profit margins fell 6% y-o-y due to heavy promotional and sales activities to clear inventory before the implementation of the GST.

Analysts expect Padini’s dividend payouts to remain intact despite the anticipated margin compression going forward.

“The free cashflow generation of the company is high, so I believe the yield is sustainable. We have reduced the earnings forecast to 10 sen per share. Even at that level, we expect the dividend yield to be more than 5%,” says AllianceDBS Research analyst Cheah King Yoong.  

The company’s balance sheet looks strong. As at Dec 31, 2014, it had a net cash balance of RM121.64 million, or 18.5 sen per share, after deducting borrowings. Its retained earnings stood at RM321.65 million.  This indicates that the company can afford to make a bonus issue.

At present, the company’s share base is at 657.9 million, with par value of 10 sen.   

When asked if Padini has any additional goodies in store for its shareholders, it says, “Based on what has transpired thus far, the company does not have any plans for bumper dividends or bonus issues.”

MIDF Research points out that the payout ratio and absolute dividend paid have increased from year to year at two sen per annum since FY2012.

“We believe management will strive to continue paying dividends. While Padini is in the midst of expanding its distribution network — which dilutes profit margins — the company commands strong free cashflow generation and thus, we believe dividend payouts can be sustained,” says the research house.

Padini plans to add six Padini Concept Stores and six Brands Outlet stores in FY2015. As for FY2016, the company says it is expecting an additional four Padini Concept Stores and five Brands Outlet stores. Nonetheless, it says the opening of these stores will depend on the completion of new malls.  

As intense competition and weak consumer sentiment continue to be a drag on earnings, analysts opine that Brands Outlet, its value-for-money brand, will be the growth engine for Padini going forward. Based on its segmental information, Brands Outlet stores contributed close to half of the company’s profit in 1HFY2015.  

“We are still positive on Padini’s Brands Outlet stores as they appeal to the mass market and could provide some resilience to earnings in times of slower or more selective consumer spending. Brands Outlet’s same store sales growth was 16% in FY2014 and 8% in 1QFY2015,” Maybank Investment Research says in a report.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on March 2 - 8, 2015.

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