Tuesday, 12 March 2013

Padini Holdings Bhd - Strong balance sheet

We came away from the recent meeting with Padini's management with our cautious view unchanged. While FY14 should see some bright spots emerge, we anticipate that 2H13 earnings would likely remain weak. As such, we are cutting our earnings estimates from RM107.9mRM126.6m to RM88.6m-RM108.5m (EPS of 13.5-16.5 sen) for FY13-FY14E, underpinned by the progressive weakening of consumer spending and intensifying competition, which has already affected Padini's revenue and net profit in 1H13. That said, we believe that much of the negative impact to the top line and bottom line has already been priced in. We also anticipate a higher dividend payout in FY14E given the Group's stronger balance sheet and a larger net cash position of RM153.7m (cash per share of RM0.23) as compared to RM86.8m half a year earlier which should provide an added buffer against further share price weakness. We maintain a MARKET PERFORM call on Padini, with a TP of RM1.84. This implies a 11.2x Fwd PER on FY14E earnings, and together with a decent FY13-FY14E net dividend yield of 4.3%-5.3%, the stock offers a total return of 4.3%.

Bright spots to be seen in FY14. FY14 is looking like a better year as ongoing store refurbishments and the addition of a larger variety of higher mark-up trendy merchandise alongside regular range should come to fruition. The various initiatives undertaken by Padini’s management are expected to add on to the visual appeal of its stores and draw visitor traffic. In doing so, there would be less pressure to maintain the current efforts of heavy discounting and promotional activities and as such, we expect the group’s gross margin pressure to alleviate in FY14.

5 new outlets to open in FY14. Furthermore, FY14 should also see a resumption of new store openings, which had driven revenue growth over the years. After a brief hiatus, Padini will be opening five new outlets in FY14. This includes 3 Brands Outlets (Penang, Miri and Seremban) and 2 Padini Concept stores (Penang and Miri) which would collectively add almost 10% or 71,000 square feet of retail floor space to the Group's existing 720,000 square feet. This would also bring the store count to 99 stores (48 single brand stores, 28 Padini Concept stores and 23 Brands Outlet stores).

Strong balance sheet. We also see some light at the end of the tunnel in Padini’s strengthening balance sheet. From the recent results release, we noticed that Padini's net cash position has increased to RM153.7m from RM86.8m just half a year ago. This translates to a cash per share of RM0.23, and with a minimal CAPEX of RM15m-RM25m expected for FY13-FY14E, we anticipate that the Group would pay out a higher dividend of 8.0-10.0 sen or for FY13-14E (from 8.0-9.0 sen earlier). This implies an attractive dividend yield of 4.3%-5.3%, which is notably higher than the 3.5% average dividend yield offered by blue-chip stocks within the benchmark FBM KLCI.

2H13 earnings likely remain weak, but the negatives could have largely priced in. We expect 2H13 earnings to remain weak, and management has highlighted more subdued sales leading to CNY (3Q13). As such, we lower our earnings estimates by 17.9-14.8% for FY13-FY14E to RM88.6m-RM108.5 (from RM107.9m-RM126.6m previously). Nevertheless, Padini's management has also guided that the Group's gross margin may have bottomed in 2Q13 (45.5% against the 45.5%-60% range over the past 5 years). We also note that consensus has already adjusted their earnings, and we believe that much of the negative impact to the top and bottom lines has already priced in. The stronger balance sheet and higher dividend yield offered by the stock should provide an added buffer against further share price weakness.

Source: Kenanga

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