Padini - A Yield Play In The Making

From a recent visit, we gather that Padini’s 2H outlook may soften. While the apparel retailer is on track to pay an 8 sen/share dividend for FY13, we see a more generous payout for FY14. Given the thinner margins and stiff competition, we are lowering our estimates for FY13 and FY14. Downgrade to NEUTRAL, with a new RM1.95 FV, as its share price has risen by about 8.3% less than a month since we reiterated our Buy call.

Softer numbers for 2H. Padini’s last quarterly results were below street estimates, attributed to higher expenses due to the opening of new stores and thinner margins as consumers shifted to value-for-money items. 2HFY13 margins will still be under pressure resulting in weaker earnings, especially since Jan-June is usually a quieter period for retailers.

Brands Outlets appeal to value hunters. In response to changing consumer spending patterns, the group will focus on its Brands Outlet stores targeting the lower spectrum of the retail market. Five new stores are in the pipeline, including three Brands Outlet stores in Penang, Miri and Seremban, and one Padini Concept Store each in Penang and Miri. Padini is also looking to expand abroad, primarily in ASEAN, in the medium term. Last year, it signed an exclusive 10-year master franchise agreement with FJ Benjamin Indonesia for the distribution of Vincci products in Indonesia.

Dividend payout may get higher. The cash-rich group has declared a DPS of 6 sen, which should meet our 8 sen DPS forecast for FY13. Padini’s management has guided that the FY14 dividend payout will be more generous, and we expect it would be around 10 sen/share, which will translate into a dividend yield of 4.9%.

Downgrade to NEUTRAL. As consumers shift towards value items and competition intensifies, we see some margin compression moving forward. To reflect this, we are trimming both our FY13 and FY14 forecasts by 15.7%. We also lower our FV to RM1.95 as we roll over our valuation to 14x FY14 EPS. We downgrade Padini to Neutral as the stock is trading our revised FV.

Source: RHB