Friday 29 Mar 2024
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KUALA LUMPUR: As retail brands catering to middle-income customers fight tooth and nail for a bigger slice of the crowded retail market, industry observers see local brands end up bloody and bruised from the resulting profit margin squeeze.

Hence, most are recommending that investors wait for the latest quarterly results, post-goods and services tax (GST) — scheduled to be released in the next two weeks — before making investment decisions on retail-related counters.

For example, analysts are expecting local brands such as Padini Holdings Bhd and Bonia Bhd to perform weaker in the three months ended June 30.

William Capital Plt chief investment officer William Ng said Padini, which carries brands such as Padini, Vincci, SEED, Yee Fong Hung and Mikihouse, are competing head-to-head with international brands such as Uniqlo, Topman, Topshop, and Dorothy Perkins (brought in by Wing Tai Malaysia Bhd) and MNG (brought in by Jerasia Capital Bhd) in the middle-class consumer market.

“It would be great if local brands like Padini manage to maintain its revenue and profit post-GST as consumers are still adapting to the rising cost of living after the introduction of GST,” Ng told digitaledge DAILY.

Although Ng noted that Padini had been working hard to maintain its market share by having sales more often and going into the lower-middle class market through its Brands Outlet stores, he expects Padini’s post-GST results to be weak. 

In its third quarter ended March 31, 2015 (3QFY15), Padini recorded a stronger revenue of RM64.8 million, an increase of 29.6%, which was attributable to the longer Chinese New Year shopping season, and boosted by the additional seven Brands Outlet Stores and six Padini Concept Stores that opened after the end of 3QFY14.

However, its gross margin for 3QFY15 had fallen by about 1.8% year-on-year due primarily to the group’s focus on delivering value and strengthening its position in the sub-sector that it operates.

Ng said Padini’s dividend yield made the stock attractive — according to The Edge Research, Padini’s 12-month rolling dividend yield stood at 7.24% — but he doubted it would be sustainable if its revenue and profit suffer in coming months.

As it is, Retail Group Malaysia had cut its retail sales growth forecast for 2015 for the third time to 4% from 4.9% as consumers held back their spending on higher cost of living, softer ringgit and higher cost of doing business.

But another analyst attached to a local broking firm believes Padini remains attractive, not only due to its high dividend yield, but also its strong balance sheet and undervalued price. It closed at RM1.33 last Friday, down 32.1% from RM1.96 on Aug 7 last year.

Still, he admits that local retail brands will continue to lose their market share to foreign brands in the long run as the price differences between local and foreign-branded apparels are not big.

“To stay competitive, [local] retail players need larger economies of scale, to be more efficient with their operation and cut down wastage. Plus, they need overseas expansion,” the analyst said.

On the other hand, Ng said foreign-brand retailers Wing Tai (fundamental: 1.05; valuation: 2.4) and Jerasia Capital (fundamental: 0.8; valuation:1.7) have been gaining traction among investors of late, which saw an increase in their trading volumes.

Ng prefers Wing Tai as he believes the addition of the Uniqlo brand will boost the company’s earnings.

Last Friday, Uniqlo — which currently has 25 stores throughout Malaysia — announced it would be opening seven more stores nationwide between September and November, which will also see it venturing into east Malaysia.

These stores will be located in the Klang Valley (The Curve), Perak (Aeon Klebang), Kedah (Aman Sentral), Sabah (Imago KK Times Square and Suria Sabah), and Sarawak (The Spring Mall and Vivacity Megamall).

Ng said Wing Tai’s operating profit from the retail division might have slipped to RM19.4 million in 3QFY15 from RM23.6 million in 3QFY14 due to a softer market and the weakening of the ringgit, he sees the group performing well in the long run.

Wing Tai closed at RM1.19 last Friday for a market capitalisation of RM571.88 million. It’s trading at a price-earnings ratio (PER) of 5.31 times. Year-to-date, the stock has fallen some 61.62% from RM1.58.

Jerasia, meanwhile, almost doubled to 88 sen last Friday from around 46 sen on Jan 2, and is trading at a PER of 7.16 times, with a market value of RM72.2 million.

This is after it posted a record net profit of RM11.93 million for its financial year ended March 31, 2015 — up 137.4% from RM5.03 million a year ago — with its retail segment contributing RM6.36 million (FY14: RM4.74 million), mainly due to pre-GST sales.

“I’d say the stock (Jerasia) is traded at fair value now, [it] is not as attractive as Wing Tai now,” Ng added.

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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. Go to www.theedgemarkets.com for more details on a company’s financial dashboard.

 

This article first appeared in digitaledge Daily, on August 10, 2015.

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