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Padini Holdings Malaysia Company Guide Padini Holdings Version 8 | Bloomberg: PAD MK | Reuters: PDNI.KL Refer to important disclosures at the end of this report DBS Group Research . Equity 21 Feb 2017 Fashions with value, upgrade to BUY (Upgrade from hold) BUY Last Traded Price ( 20 Feb 2017): RM2.58 (KLCI : 1,712.58) Value emerged, upgrade to BUY. While we remain cautious that Price Target 12-mth: RM2.95 (14% upside) Padini Holdings’ (Padini) profit margin could come under Potential Catalyst: Stronger-than-expected topline growth pressure in 2HFY17 due to the weak ringgit, we upgrade our Where we differ: In line with consensus recommendation for Padini to BUY, given that value has Analyst emerged following its share price retracement by about 10% King Yoong CHEAH +60 32604 3908 [email protected] since our recent downgrade. What’s New Earnings came within expectations Strong quarter, within ours but above street expectations. The group reported strong 2QFY17 earnings of RM54m (65% y-o-y), GP margin could come under pressure in the driven by (1) 25% growth in revenue, and (2) higher GP margin coming quarters of 42% (vs 40% in 2QFY16) due to less product markdown during its special 4-day nationwide special sales. Its earnings But value has emerged due to share retracement accounted for 52%/57% of our/consensus full-year earnings forecasts. Upgrade to BUY with TP of RM2.95 GP margin could come under pressure due to weak ringgit. The group sources about 80-90% of its products from China, Price Relative through its sourcing agents. Although we understand that the correlations between currency movement and its GP margin is not so direct given that its sourcing agents could opt to absorb the currency difference, we maintain our view that margins could come under pressure in the 2HFY17 due to the persistent ringgit weakness since Nov 2016. Valuation: The stock has corrected by about 10% since our downgrade Forecasts and Valuation back in end-Nov 2016. We believe that value has emerged in FY Jun (RM m) 2015A 2016A 2017F 2018F Revenue 978 1,301 1,418 1,527 view of its share price retracement given that the stock EBITDA 142 222 245 248 currently trades at an implied PEG <1 and our TP provides total Pre-tax Profit 112 187 210 215 return of >15%. Furthermore, the group may declare a special Net Profit 80.2 137 156 159 dividend of 1.5sen/share should earnings growth momentum Net Pft (Pre Ex.) 80.2 138 156 159 Net Pft Gth (Pre-ex) (%) (11.8) 72.0 12.8 2.4 is sustained, giving an attractive yield of 4.5% (3.9% without EPS (sen) 12.2 20.9 23.7 24.2 special dividend). As such, we upgrade our recommendation to EPS Pre Ex. (sen) 12.2 21.0 23.7 24.2 BUY with an unchanged TP of RM2.95, pegged to a 12x EPS Gth Pre Ex (%) (12) 72 13 2 Diluted EPS (sen) 12.2 21.0 23.7 24.2 forward PE. Net DPS (sen) 10.0 11.5 10.0 10.0 BV Per Share (sen) 61.6 71.3 84.9 99.2 Key Risks to Our View: PE (X) 21.2 12.4 10.9 10.6 Weaker-than-expected consumer spending and increasingly PE Pre Ex. (X) 21.2 12.3 10.9 10.6 P/Cash Flow (X) 8.8 9.6 9.4 9.4 competitive industry landscape. EV/EBITDA (X) 10.5 6.4 5.4 5.0 Net Div Yield (%) 3.9 4.5 3.9 3.9 At A Glance P/Book Value (X) 4.2 3.6 3.0 2.6 Issued Capital (m shrs) 658 Net Debt/Equity (X) CASH CASH CASH CASH Mkt. Cap (RMm/US$m) 1,697 / 381 ROAE (%) 20.2 31.4 30.3 26.3 Major Shareholders (%) Earnings Rev (%): 0 0 2 Yong Pang Chaun Holdings Sdn Bhd 43.7 Consensus EPS (sen): N/A 22.4 24.6 Skim Amanah Saham Bumiputera 5.0 Other Broker Recs: B: 5 S: 0 H: 7 Free Float (%) 50.1 Source of all data on this page: Company, AllianceDBS, Bloomberg 3m Avg. Daily Val (US$m) 0.83 Finance L.P ICB Industry : Consumer Goods / Personal Goods ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa:BC, PY Company Guide Padini Holdings WHAT’S NEW Back to its fashionable self Trending higher: The group reported sterling 2QFY17 under pressure in the 2HFY17 due to the persistent ringgit earnings of RM54m (+67% y-o-y, +90% q-o-q), supported by weakness. Since 8 November, ringgit has depreciated about 25% y-o-y growth in revenue. The strong revenue growth 4.5% against RMB. was mainly driven by (1) strong sales growth in existing Increased likelihood of a special dividend. The group declared stores, supported by its mix & match bundling and one piece a third interim dividend of 2.5sen/share, bringing its dividend promotional strategies, and (2) additional eight Padini payout to date to 7.5sen per share. We are maintaining our Concept Store and five Brands Outlet stores in operation, DPS forecasts of 10sen, but now foresee that the group may compared with 2QFY16. This brings 1HFY17 earnings to declare a special dividend of 1.5sen/share should earnings RM83m, accounting for 52/57% of our and consensus’ full- growth momentum is sustained, giving an attractive yield of year projections. 4.5% (3.9% without special dividend). GP margin remained strong during the quarter, but could be under pressure going forward. Gross profit (GP) margin for the quarter strengthened by 200bps y-o-y to 42%, mainly supported by less product mark down during the quarter despite the group engaging in 4-day special sales nationwide. The group sources about 80-90% of its products from China and the remaining from regional, through its sourcing agents. Although we understand that the correlations between currency movement and its GP margin is not so direct given that its sourcing agents could opt to absorb the currency difference, we maintain our view that margins could come Quarterly / Interim Income Statement (RMm) FY Jun 2Q2016 1Q2017 2Q2017 % chg yoy % chg qoq Revenue 340 310 427 25.3 37.6 Cost of Goods Sold (204) (182) (248) 21.4 36.7 Gross Profit 136 129 178 31.3 38.8 Other Oper. (Exp)/Inc (91.0) (88.9) (106) 16.2 19.0 Operating Profit 44.9 39.7 72.7 61.9 83.2 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 nm nm Associates & JV Inc 0.0 0.0 0.0 nm nm Net Interest (Exp)/Inc (0.4) 0.0 0.15 nm nm Exceptional Gain/(Loss) 0.0 0.0 (0.2) nm nm Pre-tax Profit 44.5 39.7 72.7 63.3 83.1 Tax (11.5) (11.0) (18.3) 59.4 66.1 Minority Interest 0.0 0.0 0.0 nm nm Net Profit 33.1 28.7 54.4 64.6 89.7 Net profit bef Except. 33.1 28.7 54.6 65.1 90.3 EBITDA 53.5 48.8 81.9 53.2 67.8 Margins (%) Gross Margins 39.9 41.5 41.8 Opg Profit Margins 13.2 12.8 17.0 Net Profit Margins 9.7 9.3 12.8 Source of all data: Company, AllianceDBS ASIAN INSIGHTS VICKERS SECURITIES Page 2 Company Guide Padini Holdings Total retail floor space (k sq ft) CRITICAL DATA POINTS TO WATCH Earnings Drivers: SSSG and number of new outlets are key revenue drivers. Like other fashion retailers, same store sales growth (SSSG) and the number of outlets opened by the group in the financial year is a key revenue driver for the group. After a strong performance in FY16, we estimate SSSG for FY17 to be about 2%, dragged by waning popularity of its popular mix-and-match bundling strategy for Padini Concept Stores (PCS). We believe that the group’s topline will continue to be sustained by full Revenue growth (%) contributions from 13 stores opened in FY16 and the opening of another 15 stores slated for FY17. Brand Outlet could benefit from downtrading. We observe that consumers are increasingly looking for value in the competitive apparel market. This bodes well for the group’s rising star, Brands Outlet’s expansion over the next 2-3 years. Huge untapped market in suburban cities. The group will focus on the Brands Outlet (BO) chain over the next three years, to improve business scale, distribution network, and operating SSS growth (%) leverage, to strengthen its presence in the local apparel market. Management sees business opportunities in the huge underserved markets in Malaysia’s suburban cities, and tapping these markets should keep it busy over the next few years. Once BO hits saturation point, management will review its growth strategy, including expanding its product lines and overseas business. Margin compression remains a key concern. We are concerned that the popularity of its mix-and-match bundling strategy implemented in PCS will eventually taper off, which could drag Revenue growth from exports, consignment & others (%) down its SSSG, given the slower-than-expected recovery in domestic consumer spending. Given the ringgit's depreciation against RMB and USD, we expect the group’s margins to come under pressure. Revenue growth from new floor spaces (%) Source: Company, AllianceDBS ASIAN INSIGHTS VICKERS SECURITIES Page 3 Company Guide Padini Holdings Leverage & Asset Turnover (x) Balance Sheet: Strong balance sheet – net cash position. The group is in a net cash position, which allows the group to (1) sustain its dividend policy of at least 10 sen per share, and (2) undertake outlet expansion without stretching its balance sheet.
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