KUALA LUMPUR (Aug 16): Padini Holdings Bhd is expected to open 10 new domestic outlets in the current financial year ending June 30, 2018 (FY2018), which is lower than the 14 outlets it opened in FY2017, says Credit Suisse AG.
“Beyond FY18, however, this number is expected to moderate to mid-high single digit,” Credit Suisse research analyst Joanna Cheah wrote in a note to clients today, following her recent meeting with Padini and its management team.
Cheah noted that Padini currently operates 126 stores, which consist of 42 Padini Concept Stores, 47 Brands Outlet Stores, and 37 stand-alone stores.
Padini’s next phase of growth, Cheah said, will come from its overseas expansion, where the clothing retailer has earmarked to set up three to five Padini Concept Stores within the next one to two years.
“Padini is making its foray into Cambodia in FY18. There are currently three Vincci outlets in Phnom Penh under franchise agreements, which the group plans to take over,” Cheah said, forecasting the capital expenditure to increase as it opens up new stores.
As for sales, Cheah noted that it grew 17% during the nine months ended March 31, 2017, driven by 13 new stores.
In FY18, Cheah said Padini has set an internal target to achieve a same-store-sales growth (SSSG) of at least 8%, which is in line with the 8% to 9% of SSSG that it chalked in the 9MFY17 period.
To alleviate cost pressures, Cheah noted that Padini has recently started sourcing goods from Pakistan and Myanmar, as cost of goods from its primary source, China, has gone up.
“Over the long run, management is still guiding for gross profit margins (GPM) to be between 38% and 40%, although we note that the group achieved 41% in 9MFY17,” she said, adding that the recent store rental renewals come with better leasing terms, which “should help sustain operating margins.”
As for Padini’s upcoming quarterly results — estimated to be released by end-August — Cheah expects “a strong showing”, thanks to the Hari Raya festive period.
For the fourth quarter ended June 30, 2017 (4QFY17), Cheah expects Padini’s net profit to come in at RM46 million, 23% higher than RM37.36 million recorded in 4QFY16. This, Cheah added, will result in annual net profit to rise by 19.4% to RM164 million in FY17 from RM137.39 million in FY16.
Following stronger earnings expectation, Cheah forecasts Padini’s earnings to grow by 5% in FY18 and 8% in FY19.
“Our earnings upgrades are mainly predicated on continued strong sales growth within the Vincci and Padini brands, along with Brands Outlet stores,” she added.
On Padini’s valuation, Cheah said the stock “does not look lofty”, despite the counter’s 60% rally year-to-date. The stock is currently trading at nearly 14-times price-earnings.
“We believe the stock deserves a re-rating given the several years of good earnings delivery, a much improved balance sheet, and cash conversion cycle versus five years ago,” she said.
Keeping her “outperform” call on the clothing retailer’s stock, Cheah has raised the target price to RM4.65 per share from RM4.08, implying a 16% potential upside.
Shares in Padini dipped one sen or 0.24% lower to close at RM4.16 today, giving a market capitalisation of RM2.74 billion.