Padini Holdings - Expansion plan remains on track BUY

- 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