Padini Holdings Bhd
(Aug 19, RM1.40)
Maintain buy with a higher fair value of RM1.80: We reaffirm our “buy” recommendation on Padini Holdings with a higher fair value of RM1.80 per share (versus RM1.70 per share previously), pegged to an unchanged price-earnings (PE) multiples of 13 times financial year 2016 forecast (FY16F) earnings. This is following its results for financial year ended June 30, 2015, which outperformed our estimates by 23%, as the margin contraction of earnings before interest and taxes was not as severe as we had earlier anticipated.

Padini posted a net profit of RM18 million for the fourth quarter (4QFY15) [quarter-on-quarter: -32%; year-on-year (y-o-y): +33%), bringing its headline FY15 earnings to RM80 million (y-o-y: -12%)]. It was driven by a strong top-line growth of 13% y-o-y, which was also helped by the earlier arrival of Hari Raya Aidilfitri. This was despite challenges in the industry, namely a slowdown in consumer spending arising from the implementation of the goods and service tax (GST) in April.

A gross interim dividend of 2.5 sen per share for 1QFY16 was declared. Padini’s earnings were lower on a y-o-y basis, following a decline in gross profit margin by three percentage points, mainly due to heavy discounting and GST cost absorption during the year.

Nonetheless, we expect earnings to rebound in FY16F, in view of our expectations of improving same-store sales growth and gross margin outlook. This is underpinned by progressive selling price adjustments to be implemented from October, expectations of a short-lived weak consumer spending and a low base effect. Padini’s ramp-up of new stores should also be supportive of earnings growth.

FY16F earnings are projected to grow 13% to RM91 million, and by another 13% to RM102 million for FY17F. We introduce FY18F earnings at RM117 million. Padini will continue to emphasise its high-growth Brands Outlet brand as it continues to do well (43% of FY15 profit before tax), given its strong position in the value-for-money market.

The company opened 10 new stores in FY15, with 16 new stores in the pipeline for FY16F. We expect start-up costs to remain well contained. Padini’s business is highly cash-generative with a net cash position of RM98 million as at end-FY15. Dividend yield remains attractive at 7.4%, backed by the company’s commitment to a dividend of 10 sen per share per annum.

The stock remains a “buy”, backed by a strong footing and wide distribution network, which is well positioned to capture the recovery of consumer spending patterns, a compelling valuation at 10 times PE of FY16F, which is below its five-year historical mean of 13 times, and an attractive dividend yield, which provides downside risk to the share price. — AmResearch, Aug 19

This article first appeared in digitaledge Daily, on August 20, 2015.