Padini’s long-term earnings growth prospect remains positive

Padini’s long-term earnings growth prospect remains positive
Business & Markets 2014
Written by Alliance Research
Friday, 21 March 2014 11:05

Padini Holdings Bhd
(March 20, RM2.07)
Downgrade to neutral with target price of RM2.12: On March 14, We met up with Padini’s executive director Chan Kwai Heng to get an update on the company, following its impressive results for the second quarter ended Dec 31 of financial year 2014 (2QFY14).

Its core net profit for 2QFY14 grew 45.7% year-on-year (y-o-y) and 2.5% quarter-on-quarter (q-o-q), underpinned by: (i) strong same-store-sales (SSS) growth of more than 30% y-o-y driven mainly by Brands Outlet (BO); and (ii) stabilised profitability following management’s decision to reposition its product offerings and pricing, particularly in the Padini Concept Stores (PCS) which recorded 5% to 6% SSS growth in the quarter.

As such, first half (1HFY14) core net profit beat expectations as it made up 59% to 60% of our and consensus’ full-year forecasts.

During the meeting, management revealed that the group has successfully stabilised its profitability, thanks to the bundled sales strategy implemented by PCS to push for higher sales volume, instead of slashing the average selling price of single product in order to stay competitive in the market.

Management also shared that its key flagship brand Vincci, which contributed 24% of its 1HFY14 revenue compared with more than 30% in the past, is currently reviewing its merchandising strategy with the aim of increasing the value proposition of its product offering. We view this as a potential positive surprise if the brand manages to rejuvenate its sluggish SSS with improved product quality.

Going forward, the group will focus on expanding its BO, which has overtaken Vincci as the second largest revenue (1HFY14: 29%) and profit before tax (1HFY14: 32%) contributor to the group. While management did not provide guidance on store expansion beyond FY14, we are optimistic that retail floor space will continue to expand (although we do not factor in any), underpinned by strong pipeline of new malls opening over the next two to three years.

In view of strong share price performance (+24%) since our upgrade on Feb 27, 2014, we downgrade the stock from “strong buy” to “neutral” with an unchanged target price of RM2.12, based on 13 times 12-month forward price-earnings ratio (ex-cash is 11.6 times).

Over the long term, we remain positive on Padini’s earnings growth prospect, underpinned by: (i) its experienced management team which has strong knowledge of domestic consumer spending behaviour; (ii) huge untapped market for BO; and (iii) strong pipeline of new malls opening in Malaysia. — Alliance Research, March 20, 2014


This article first appeared in The Edge Financial Daily, on March 21, 2014.