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Wednesday, February 22, 2017

Weak ringgit to impact Padini's profit margin in the second half of the year

Tuesday, 21 February 2017 | MYT 3:01 PM


PETALING JAYA: Padini Holdings Bhd, which saw its net profit for the second quarter ended December 31, 2016 rising by 65%, could see its profit margin coming under pressure in the second half of the year due to the weak ringgit.

AllianceDBS Research, which is upgrading the stock to a buy with unchanged target price of RM2.95, on Tuesday said although the correlations between currency movement and its gross profit (GP) margin is not so direct given its sourcing agents could opt to absorb the currency difference, margins could come under pressure in the second half due to the persistent ringgit weakness since November last year.

Currently, the group sources about 80%-90% of its products from China, through its sourcing agents, it noted. The group reported strong second quarter earnings of RM54mil compared with 33.1mil a year ago driven by 25% growth in revenue, a higher GP margin of 42% (vs 40% a year ago) due to less product markdown during its special four day nationwide special sales.

Its earnings accounted for 52%/57% of the research house consensus full-year earnings forecasts.

The stock has corrected by about 10% since the brokerage downgraded it back in end-Nov 2016. “We believe that value has emerged in view of its share price retracement given that the stock currently trades at an implied price earnings growth (PEG) of less than one and our target price provides total return of more than 15%.

“Furthermore, the group may declare a special dividend of 1.5sen per share should earnings growth momentum is sustained, giving an attractive yield of 4.5% (3.9% without special dividend),’’ it noted.

The key risks to the company could be in the form of weaker-than-expected consumer spending and increasingly competitive industry landscape.


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