Padini Holdings - Stronger-than-expected performance BUY

- We maintain our BUY recommendation on Padini, with an unchanged fair value of RM2.15/share based on a 10% discount to our DCF value of RM2.39/share. Taken together with an implied PE of 14x, our fair value provides  a potential upside of 20% at its current share price.

- Padini registered a core net profit of RM24mil (-15% QoQ) for its 3QFY12, which brought 9MFY12 earnings to RM80mil (+39% YoY). This is stronger than expected, accounting for 96% of our forecast and 91% of consensus estimates. 

- The stronger-than-expected 9MFY12 result was contributed by an additional 98,000sf of gross floor area, resulting in an acceleration of RM28mil (+19% YoY)  in revenue.

- Pre-tax profit did not rise in tandem with revenue, but dropped by RM1.4mil (-4%) YoY. This was due to an 8ppt- decline YoY in gross margin. Gross margin for 9MFY11 was at an exceptionally high 60% (vs. 52% 9MFY12) due to better-than-usual sell-through rates for merchandises offered for sale.  

- Comparing to the preceding quarter, 3QFY12 revenue was down by RM26mil (-13% QoQ) due to the early ChineseNew Year in January. This had led to an earlier shopping period that took place in December, resulting in sturdy sales in 2QFY12. On top of this, 3QFY12 endured a longer period of subdued retail activity before promotional activities kicked off in mid-March. 

- Our earnings forecasts remain unchanged for a three-year CAGR of 12% over FY12F-FY14F. Padini’s growth remains intact underpinned by:-  (1) Ten additional stores – 4 Concept Stores, and 6 Brands Outlet – opening during FY12, adding 130,000sf to its overall gross floor area under retail; and  (2) Upcoming nationwide sales. 

- Padini declared a second interim dividend of 2.0 sen/share, amounting to RM13mil during the quarter. Given Padini’s encouraging performance, a third interim dividend of 2.0/share was declared yesterday. As such, a total  of 6 sen/share have been declared for FY12. 

- Our BUY recommendation is premised on:- (1) Solid balance sheet with net cash of RM144mil as at end-9MFY12; (2) Acclaimed brands under its portfolio; (3) Penetration of Brands Outlet into the middle- to lower-end market, given its encouraging sales performance; and (4) Potential growth opportunities in the domestic market especially in urban areas

Source: AmeSecurities