PADINI (7052) - Padini’s sales expected to remain resilient

Padini’s sales expected to remain resilient

This article first appeared in The Edge Financial Daily, on July 25, 2016.

Padini Holdings Bhd
(July 22, RM2.61)
Maintain buy with a higher fair value (FV) of RM3: We maintain “buy” on Padini Holdings Bhd, with a higher FV of RM3 per share, versus RM2.70 per share previously. Our fair value for Padini is based on a financial year 2017 forecast (FY17F) price-earnings ratio of 13 times. Padini’s foreign shareholding is 25% currently.

We have raised Padini’s FY16F and FY17F earnings estimates by 7% and 11% respectively, as earnings before interest and tax (Ebit) margin and sales during the recent Raya festive period were better than expected.

We remain positive on Padini’s prospects as sales are expected to remain resilient, supported by the affordable pricing of its products. We like Padini for its: i) strong brand recognition; ii) sterling earnings track record; iii) wide distribution network and iv) dominant position in the retail and apparel industry.

We believe Padini’s earnings momentum would continue into FY17F, underpinned by the opening of six new stores in the first half of the financial year.

The six stores are expected to consist of three concept stores and three brand outlets. These stores include those that would be located in Sunway Velocity Mall, Design Village in Penang and Aeon Melawati.

We have assumed a sales growth per store of 12.9% in FY17F, compared with 15.3% in FY16F. Same-store sales growth was 18% y-o-y for concept stores and 9% y-o-y for brands outlets in the first nine months of FY16.

We expect Padini’s pre-tax profit margin to improve in FY17F, supported by appreciation of the ringgit against the yuan.

As such, we have raised our assumption of Padini’s Ebit margin from 14.5% previously to 15.5% each in FY16F and FY17F. Since the beginning of the year, the ringgit has appreciated by 9.7% against the yuan. About 90% of Padini’s inventories are sourced from suppliers in China.

We believe there is minimal threat from online boutiques as selling prices of Padini’s apparel at its physical stores are still attractive. Presently, Padini’s online shop, which commenced operations in November 2015, generates less than RM100,000 of revenue.

Padini’s balance sheet is clean as reflected in the net cash per share of 24 sen as at end-March 2016. Free cash flows are estimated at 28 sen per share in FY17F, compared with an estimated 21 sen per share in FY16F. — AmInvestment Bank, July 22

PADINI (7052) - Padini’s sales expected to remain resilient