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This article first appeared in The Edge Financial Daily on May 25, 2018

Padini Holdings Bhd
(May 24, RM5.30)
Maintain hold with an unchanged target price (TP) of RM5.05:
Padini reported third quarter of financial year 2018 (3QFY18) earnings of RM39.8 million (increase of 14% year-on-year [y-o-y]; decrease of 20% quarter-of-quarter [q-o-q]). The y-o-y improvement in earnings was mainly driven by: i) 13.8% growth in top line; and ii) strengthening of the gross profit margin from 41% in 3QFY17 to 42% in 3QFY18 due to better product mix and ringgit rebound that reduced the costs of imported inventories. Nonetheless, 3QFY18 earnings were partially dragged down by higher selling and distribution cost (+18% y-o-y).

Revenue for 3QFY18 increased by 13.8% y-o-y, mainly driven by the opening of six Padini Concept stores and six Brands Outlet stores, and continued strong demand for its fashionable products.

We believe that q-o-q performance does not serve as a good comparison given that Padini’s business is highly seasonal.

This brings its nine months of FY18 (9MFY18) earnings to RM121 million, accounting for about 67% of our full-year forecast. Although we anticipate stronger 4QFY18 results, supported by a recovery in consumer spending arising from feel-good consumer sentiments post the general election and zero-rated goods and services tax adjustment from June 1, coupled with the Hari Raya festive sales, we deem the results to be marginally below expectations.

The key variance between our FY18 earnings forecasts and reported earnings stems from the higher-than expected selling and distribution expenses.

We cut our FY18 earnings estimates by 6% to account for lower-than-expected 9MFY18 earnings but maintain FY19 and FY20 earnings forecasts. As we gather that the group has engaged in a cost-optimisation exercise and in anticipation of the recovery in consumer spending going forward, we remain positive about the group’s earnings prospects.

A four sen per share dividend was declared (2.5 sen third interim dividend plus 1.5 sen special dividend). This brings the group’s 9MFY18 dividend declared to nine sen per share, which is within our expectations.

Our TP is pegged at 15 times forward price-earnings, which is +1 standard deviation above its historical mean. — DBS Group Research, May 24

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