- We re-affirm BUY on Padini Holdings and raise our fair
value to RM2.15/share (from RM1.80/share previously), based on a 10% discount
to our revised DCF value of RM2.39/share (implied PE of 14x FY12F).
- We raised our DCF value to account for a more aggressive
expansion of five stores annually from FY15F onwards.
- Following a recent meeting with management, Padini remains
on track to open another five stores in FY12F, the full impact of which would
be felt in FY13F. Its 3QFY12F results will be released at end-May. We expect a
strong set of 3Q results, as earnings are expected to improve in tandem with
its aggressive store opening. Year-to-date, five out of 10 planned new stores have
opened.
- Padini will be opening one Brands Outlet store at
Fahrenheit sometime in July or August FY13. Sales from this store would likely
be lifted from the nationwide sales – Malaysia Mega Sales and Hari Raya Sales –
throughout the June to August period. By year-end, Padini intends to introduce
a children’s line in the Brands Outlet.
- Given the encouraging sales performance of Brands Outlet
over the years (FY11: 57% YoY), we are positive on Padini’s expansion on Brands
Outlet. Although profit margins are not as high due to value-for-money merchandises,
low capex incurred in setting up the new store (50% lower than Concept Store)
and minimal operating expenses would contribute to an overall positive net
operating margin.
- Since April, trendy clothing (circa 25% of Padini) – mainly for Padini Authentic, P&Co, SEED
– have been ordered directly from manufacturers in China, instead of using
agents. As a result, marginal savings in cost and production lead time have
shrunk considerably from six to two months, enabling Padini to stay relevant
within the fashion industry and to churn out new designs at a faster pace.
- To recap, Padini is still in talks with FJ Benjamin
Indonesia with regard to the Vincci franchise licence. Should this potential
collaboration materialises, it is expected to be finalised by year-end and the
distribution to officially commence in 2HFY13. Given that Indonesia is an
untapped market, the short- to medium-term impact would not be significant
until the size of distribution network in Indonesia grows considerably large.
- We believe that the recent National Minimum Wage Policy of
RM900 and RM800 for Peninsular Malaysia and East Malaysia, respectively, would
have inconsequential impact on earnings. Currently, the lowest salary is the
front line sales staff in East Malaysia at RM600, with only seven stores.
Padini has an estimated 3,000 employees, of whom less than 10% would be beneficiaries
of the new policy.
- Padini’s performance has been encouraging, with earnings
growth of between 18% and 32% since FY07. Along with such sustainable growth,
we foresee management doling out more generous dividends moving forward.
- We like Padini due to:- (1) Its strong balance sheet (net
cash); (2) Reputable brands under its portfolio; and (3) Potential growth in
the domestic market especially in the outskirt areas; hence, our BUY
rating.
Source: AmeSecurites
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