Padini Holdings - Weaker retail spending, coupled with margin pressure HOLD

- We re-affirm our HOLD recommendation on Padini Holdings, with a lower fair value of RM1.71/share vs. RM1.80/share previously, based on our DCF value. This follows disappointing 1HFY13 results.

- Padini registered 2QFY13 earnings of RM19mil (-32% YoY, -24% QoQ), bringing 1HFY13 earnings to RM45mil (-19%YoY). The results accounted for 44% of our, and 43% of consensus, estimates. The results are below expectations and are attributed to slower-thanexpected sales.

- A second interim dividend of 2 sen/share was announced. Total dividends amounted to 4.0 sen/share to-date. In-line with management plans of declaring dividends every quarter, we have upped our dividend assumption to 8 sen/share from 6 sen/share. This translates into yields of 4.4%, representing a payout ratio of >40%.

- We believe the key weaknesses in 2QFY13 came mainly from:- (1) Slower -than-expected same store sales growth (SSSG) from the spill over of 10 stores opened in FY12 ; (2) Late arrival of Chinese New Year as opposed to FY12. Delay of retail spending will be captured in the coming 3Q; (3) PBT fell 21% QoQ due to accruing part of employees’ bonuses in which the group is committed to pay in January; and (4) Rising price competition from international retailers, for instance, H&M and Uniqlo.

- 1HFY13 gross profit margin fell to 46% vs. 1HFY12’s 49%. Increased preference over the more affordable range of the group’s merchandise, whose mark-ups are lower, had lead to margin pressure. We understand gross profit margin is sustainable at >40%.

- Padini’s 1HFY13 SSSG has been in negative territory which is also partly contributed by an overall poorer retail sentiment. Two stores – Concept Stores at Ikano Power Centre and First World Genting – are currently undergoing refurbishment.

- Moving forward, no new store is anticipated to open for the rest of FY13F, apart from the recent opening at Fahrenheit 88 in August 2012. But, the ramp-up of additional 5 stores (3 Brands Outlet and 2 Concept Store) are expected within FY14F (+10% of retail space).

- Taking all in, we have assumed a lower gross profit margin of 46% vs. 49% previously. Earnings are projected to contract by 12% on the back of slower-than-expected sales. Thereafter, earnings will rise by 8%-9%, for FY14F-FY15F, due to the increasing bias over value-for-money or discounted products coupled with store openings in the pipeline.

- We lower our SSSG assumption to 7.5%-9% for FY13F-FY15F vs. FY12’s 13%, given our view of a decelerating SSSG in the immediate- to nearterm. This is underpinned by the lack of available floor space and intensification of price competition within the retail landscape. Note that the Klang Valley generates circa 56% of domestic topline growth.

- The stock is currently trading at an implied PE of 14x FY13F, within its historical PE band.

Source: AmeSecurities