Challenging near-term outlook expected for Padini

This article first appeared in The Edge Financial Daily, on December 12, 2018.
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Padini Holdings Bhd
(Dec 11, RM3.75)
Upgrade to hold with an unchanged target price (TP) of RM4.05:
Post meeting with management, we believe Padini Holdings Bhd’s near-term outlook will remain challenging, namely on softening top-line growth and high operating expenditure (opex) for its newer stores. While our earnings forecasts and TP of RM4.05 (pegged at 18 times calendar year 2019 [CY19] price-earnings ratio [PER]) are unchanged, we have upgraded our call on Padini to “hold”. Risk-reward is close to balanced following its sharp share price decline of 28% since the release of its latest quarterly results on Nov 29, 2018.

We learnt that its earnings for the first quarter of financial year 2019 (1QFY19) ended Sept 30, 2018 were largely dragged by steeper store opex and a slower-than-expected sales performance of its newer stores, coupled with 0% same-store sales growth (SSSG) (FY18: -2% year-on-year). We think store opex could remain at similar levels in the near term, in line with its large base of 102 stores (Padini Concept Stores and Brands Outlets). At the same time, we remain cautious about Padini’s top-line growth outlook as we expect the fashion retailing segment to remain competitive, coupled with uncertainties over discretionary consumer spending. We have estimated an average of about 3% (across all brands) for our revenue/store growth assumptions for FY19 to FY21.

There is yet clear visibility of the cost impact on Padini post the implementation of the sales and services tax (SST) as its inventory was largely sourced before the implementation of the SST. However, we think gross margins are at risk to ease further due to price inflationary pressure from its suppliers as we note that most of the textile articles (clothing) fall under the 10% SST bracket. We have maintained our FY19 to FY21 gross margin assumptions of about 39% per annum for now (1QFY19: 39.9%).

We believe valuations have turned less expensive following its share price decline of 25% year to date. Padini is currently trading at 20 times CY19 PER, approximately at +1 standard deviation of the mean. Possible rerating catalysts for Padini include an earnings recovery and an improving SSSG, particularly for its newer outlets. — Maybank IB Research, Dec 7