We are initiating
coverage on Padini Holdings Berhad (“Padini”) with a MARKET PERFORM call and a
target price of RM1.84, which is based on a targeted PER of 11.2x on the
company’s FY13 EPS of 16.4 sen. Padini has a strong foothold in the domestic
market with a vast retail network of nine labels under its portfolio namely Padini,
Padini Authentics, PDI, P&Co, Seed, Vincci, Vincci+, Vincci Accessories,
and Miki Kids. The group has grown its retail presence over the years to 48
single brand stores, 26 Padini Concept Stores, 20 Brands Outlets, 155
consignment counters, 15 franchises in the domestic market and over 80
franchises and dealers in the international
arena.
5-year net profit
CAGR of 24.8%. Padini has a strong track record of revenue and earnings
growth. It has a 5-year revenue and net profit CAGR of 18.0% and 24.8%
respectively, driven primarily by the aggressive floor space expansion of its
high-growth Brands Outlet and Padini Concept stores. In just five years, Padini
has almost tripled its floor space to 699,136 sq ft, which a net addition of
129,600 sq in the past year alone.
Growing beautifully. With five more stores scheduled to open in
early FY14, much of the revenue growth in the interim will come mainly from the
gradual maturing of its outlets in new malls, which should then generate a higher
per square foot sales. Management has guided that this would be achieved via 1)
attracting customer spending by tweaking its store merchandise mix and the
perceived value and quality of Padini’s offerings, 2) improving the design to
delivery of its products to keep up with the everchanging consumer trends and
preferences and 3) continuously refurbishing its existing stores to attract
customers. We expect Padini to register a revenue of RM802.9m - RM927.1m for
FY13-FY14, which translate into revenue growth rates of 11.0%-15.5% for the two
years.
Economies of scale. Padini’s operating expenses as a percentage
of revenue has been on a declining trend over the past four years as the group benefited
from the economies of scale of more outlet openings. In addition, the revenue
per square foot for Padini’s single brand stores, Brands Outlet stores and
Padini Concept stores have been increasing, reflecting management’s efficient
use of floor space and probably better product mix. As a consequence, we expect
the net margins to improve by 13bps-21bps in FY13-FY14E.
Becoming a dividend
yield play. Although Padini does not have a formal dividend policy in
place, the group has been paying out 35%-49% of its earnings in the past five
years. We believe that with the minimal CAPEX plans expected for FY13-FY14E, it
is likely that Padini will adopt a higher dividend payout ahead. Based on our
FY13-FY14 net profit estimates of RM107.9m-RM120.5m, we expect the company to
distribute a DPS of 8 sen–9 sen, translating into attractive dividend yields of
4.4%-4.9%. Initiating Coverage on
Padini Holdings Berhad with a MARKET PERFORM
rating and a fair value of RM1.84. We have applied a 11.2x forward PER (+1.5
standard deviation above the 5-year Average PER) on our FY13 EPS forecast of
16.4 sen to derive the fair value of RM1.84. We feel that Padini deserves a
valuation closer to the larger retail industry players such as Amway and Aeon
(which are trading at +2.0SD above the mean of their 5-year average PER) given
the company’s bigger size and scale relative to the smaller garment retailers.
However, with the share price already trading close to our target price of
RM1.84, we are initiating coverage on the company with only a MARKET PERFORM
rating.
Source: Kenanga
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