This article first appeared in The Edge Financial Daily, on April 20, 2016.

Padini Holdings Bhd
(April 19, RM2.07)
Upgrade to buy with a higher target price (TP) of RM2.25: We upgrade Padini Holdings Bhd to a “buy” given that the group is expected to benefit from the ringgit’s recovery, which will lower its imported inventory cost. Its third quarter of financial year 2016 (3QFY16) results should be strong, and value has emerged following its more than 10% share price retracement since our recent downgrade.    

The group is expected to release its 3QFY16 results on May 18. We believe that the group will continue to report double-digit year-on-year growth for both its top line and bottom line. 

We are comfortable that the group is well on track to meet our revised FY16 net profit forecast of RM120 million. We revise upward our FY16 to FY18 earnings estimates by less than 5% mainly for bookkeeping purposes.  

The group sources about 65% to 70% of its products from China, which are denominated in yuan, with the remainder mainly in US dollars. 

As such, should the ringgit’s recent recovery against both currencies be sustained, this will help to lower its inventory cost and improve its margin in the coming quarters.  

Pegged to an unchanged 12 times price-earnings ratio, our TP rises to RM2.25 as we roll forward our 12-month valuation basis to the first quarter of calendar year 2017.

We upgrade the stock to a “buy”. Dividend yields of more than 5% should remain supportive of its share price.  

Key risks to our view include weaker-than-expected consumer spending and an increasingly competitive industry landscape. — AllianceDBS Research, April 19