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Thursday, January 29, 2015

Padini Holdings Berhad - Fashionably Competitive

We recently met up with the management of Padini and came away with a more negative bias post-meeting. Management shared: (i) Padini’s strategy to face the imminent implementation of Goods & Services Tax (GST), and (ii) its expansion plans moving forward. We were also briefed on the revival plan of the Vincci brand as well as how Padini positions itself in the competitive retail market in Malaysia. Maintain OUTPERFORM with lower Target Price of RM1.70 (from: RM1.78).

Going ahead with expansion. As guided earlier on, Padini has lined up 12 new openings in FY15 and another 6 more in FY16 despite the persistently soft consumer sentiment and competitive operating environment. 6 Padini Concept Store (PCS) and 6 Brands Outlet (BO) will be opened in interesting location such as Kota Kinabalu and Bintulu and also in more established locations in Sunway and Petaling Jaya. As concerns might be raised on the expansion expenses and margin compression due to weak sentiment and intense competition, management is of the view of that new outlets opening in popular area, particularly Klang Valley cannot be delayed or missed due to the exclusivity of the retail space in respective malls.

GST to be absorbed. In regards to the GST, management discounted the likelihood of price increase post-GST on 1st April 2015, with soft consumer sentiment and price sensitivity being the consideration of the Group. Thus, the Group will have to absorb the extra costs of GST for its products on the shelves before 1st of April 2015. As for new products, we expect conservative and adaptive pricing strategy to be adopted in order to take the post-GST changes in sentiment into account.

Finding remedy for Vincci. PBT contribution from Vincci slumped 50% YoY to RM3.5m in 1Q15 from RM7m in 1Q14 on the back of lower revenue of RM48.7m (down 11.6% YoY) which management attributed to complacency and competition. In order to revitalise Vincci, once the largest contributor to the Group, Padini has appointed new brand manager as well as weighing the option of sourcing its products from China instead of manufacturing in-house in Malaysia previously due to the cost advantage.

Earnings downgrade. Post-meeting, our revenue forecasts were revised down by 2%-4% after assuming lower sales contribution (-15%) from the single brand stores as more attention would be focused on the BO stores, which contributes 33.5% to the Group revenue in 1Q15. We also raise the selling and distribution costs assumption by 6-7% to reflect the more aggressive advertising and promotional activities, which resulted in lower FY15E-FY16E net profit forecasts by 12.3%-15.1%.

Maintain OUTPERFORM with lower Target Price of RM1.70 (from: RM1.78). We roll over our valuation to FY16E and peg our TP with lower PER of 12x (from 12.6x), which implies +0.5SD over the 5-year mean due to the weaker overall growth outlook. However, we think that the dividend yield of 6.7% can support the share price with management committed to the payout on the back of the sturdy balance sheet (net cash: RM84.4m) and strong cash flow. Meanwhile, on the competition in the local retail market where Padini has to take on international heavyweights such as H&M and Uniqlo, management is confident of storming through; banking on its established brand name in Malaysia, versatility in product range and diversity in stores location.

Source: Kenanga

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