This article first appeared in The Edge Financial Daily on August 29, 2019

Padini Holdings Bhd
(Aug 28, RM3.74)
Maintain sell with a lower target price (TP) of RM2.86: Padini Holdings Bhd’s fourth quarter of financial year 2019 (4QFY19) earnings declined by 4.9% year-on-year (y-o-y) to RM54.4 million while the full-year FY19 earnings declined by 10.1% y-o-y to RM160.2 million. The FY19 earnings were slightly above our and consensus’ expectations, accounting for 106% and 107% of full-year forecasts respectively.

Revenue for 4QFY19 increased by 8.1% y-o-y to RM516.5 million. The increase was partly contributed by the improved same-store sales growth (SSSG). During the quarter, SSSG was 6% higher than the prior corresponding quarter. Another reason for the improved performance was due to the opening of four additional outlets, bringing its total number of stores to 132 by June 2019.

The cost of sales increased at a faster rate than revenue resulting in its gross profit (GP) margin declining by 1.5 percentage points (ppts) y-o-y to 38.7%. The decline in GP margin is due to the group’s strategy to be very careful in revising product prices in order to protect its market share in spite of the pressures of rising costs. Profit after tax (PAT) margin declined 1.4 ppts y-o-y to 10.5% mainly contributed by the higher selling and distribution expense.

The company has declared the first interim dividend of 2.5 sen per ordinary share (single tier) for FY20, similar to that in FY19’.

We revised our TP to RM2.86 (previously RM3.09) as we rolled forward our valuation-based year to FY21. The TP is based on pegging the FY21 earnings per share of 21.2 sen per share to price earnings ratio (PER) of 13.5 times. The assigned PER multiple is -1.5 standard deviation below the group’s one-year average historical PER. This is to reflect the subdued business condition and consumer sentiment.  — MIDF Research, Aug 28