KUALA LUMPUR (Feb 17): Padini Holdings Bhd dipped as much as six sen or 4% after the apparel retailer reported lower second quarter net profit, which invited analyst downgrades on the stock.

The downgrades on Padini (fundamental: 2.8; valuation: 0.9) took into account a challenging retail sector here and the stock's expensive valuations.

Padini shares fell to its lowest, so far today at RM1.41 before reducing losses at afternoon break.

At 12:30pm, Padini settled at RM1.43 with 991,400 shares traded.

Yesterday, Padini said net profit dropped to RM16.21 million in the second quarter ended December 31, 2014 (2QFY15) from RM28.4 million a year earlier. This was despite higher revenue at RM245.59 million versus RM234.18 million.

For the six months, Padini made a net profit of RM35.45 million, down from RM56.14 million a year earlier.

Despite weaker 2QFY15 profit, Padini proposed an interim dividend of 2.5 sen per share for the quarter.

In a note to clients today, RHB Research Institute Sdn Bhd analyst Alexander Chia said the research firm downgraded Padini shares to "sell" from "neutral" due to earnings disappointments over the last few quarters.

RHB also trimmed its target price for Padini shares to RM1.30 from RM1.56, based on an unchanged price-earnings ratio (PER) of 11.5 times. The PER was based on Padini's forecasted FY15 financials.

"The stock is currently trading at a 2015 P/E of 13 times, which we deem slightly expensive relative to its 5-year historical mean P/E of 11.6 times," said Chia.

Chia said RHB had also slashed its earnings per share (EPS) forecasts for Padini amid a challenging domestic retail sector and after taking into account Padini's higher operating expenditure.

RHB cut its FY15 and FY16 EPS forecast for Padini 15.9% and 16.5% respectively while FY17 numbers were reduced by 8.2%.

"The earnings revision reflects our cautious stance on the challenging retail sector in 2015. Key risks to earnings forecasts include faster-than-expected margins recovery and favourable changes in consumer sentiment," Chia said.

(Note: 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.)