Padini (BUY, FV RM1.80, Last price RM1.45)

We recently had a follow-up visit to Padini, which is one of our Top Buys for 2012. We continue to like the stock’s resilient performance amid an increasingly turbulent operating environment. Despite the volatility in cotton prices and intense competition in the retail space, we remain confident that the company’s high inventory and wider retail network relative to its peers will hold it in good stead. Maintain BUY, with a FV of RM1.80, based on 14x FY12 EPS.

Gaining prominence. After providing 3 Good reasons (Good track record, Good growth story and Good pricing) why investors should like Padini in our previous report, the share price has rallied by a strong 13.3% to RM1.45 in just one month. Although the volatility in cotton prices and entry of new competitors might affect garment retailers in general, we continue to believe that Padini will stand strong amid the tough environment given its high inventory level and wide network of outlets versus its peers.

Unfazed by the challenges ahead.  From a macro perspective, India‟s cotton export ban will definitely affect textile and garment retailers but we believe Padini will be able to weather the storm in view of its high level of inventory and cash pile. The entry of big overseas retailers such as Top Shop, Zara, MNG, Cotton On and Uniqlo in recent years has certainly raised the bar for local garment retailers. Another fashion retailer, Hennes & Mauritz‟s (H&M), will also open its first store in Malaysia this year. We think that Padini‟s  strong  retail network and wide customer base will continue to support its growth, although the competition is becoming tougher.

Spreading its wings overseas.  FJ Benjamin Holdings, an industry leader in brand building and management, and the development of retail and distribution networks, has approached Padini  with the view to  franchising the “Vincci” brand  (under the brand name of „VNC‟) in Indonesia. The VNC franchise stores in Indonesia  have been languishing  due to pricing problems  relating to a  luxury tax on its  products. The discussions are still at the early stage but if the deal goes through, it would see Padini making a significant breakthrough in expanding overseas. Similarly, the group is also in the midst of revamping its franchisee model in Thailand.

Maintain BUY. Going forward, the group aims to introduce apparel based on overseas styles and fashion at a faster pace to Malaysians by ramping up its efficiency and come up with  new garments in 3 to  4 weeks. Maintain BUY, with  the stock‟s  fair value unchanged at RM1.80.

Source: OSK188