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Padini Holdings Malaysia Company Guide Padini Holdings Version 9 | Bloomberg: PAD MK | Reuters: PDNI.KL Refer to important disclosures at the end of this report DBS Group Research . Equity 31 May 2017 HOLD (Downgrade from buy) Still trendy, but getting pricey Last Traded Price ( 30 May 2017): RM3.29 (JCI : 5,693.39) Price Target 12-mth: RM3.00 (-9% downside) (Prev RM2.95) Downgrade to HOLD. We downgrade our recommendation for Padini to HOLD with a higher TP of RM3.00. We are taking a Analyst more cautious stance on the stock as we believe that Padini’s King Yoong CHEAH +60 32604 3908 [email protected] current valuation has priced in its near-term growth prospects. What’s New As such, we believe the stock is fairly valued at this juncture. 9MFY17 earnings within expectations 3QFY17 results came within expectations. The group’s 3QFY17 1.5 sen/share special dividend declared, not earnings dropped marginally (-1% y-o-y) to RM35m, although particularly a surprise revenue grew by 9% on a y-o-y basis. Its earnings were mainly Current valuation has priced in its growth dragged by (1) lower GP margin of 41% (vs 42% in 3QFY16) prospects due to higher inventory costs, and (2) 12% increase in selling Downgrade to HOLD with a higher TP of RM3.00 and distribution expenses during the quarter. This brings 9MFY17 earnings to RM118m, accounting for c. 76% of our and consensus’ full-year projections. We keep our earnings estimates largely unchanged. Price Relative Current valuation has priced in its growth prospects. The stock has performed remarkably well, with its share price rising 28% since our upgrade back in February. Following the strong rally, the stock has exceeded our revised TP of RM3.00. We continue to like Padini, given its solid fundamentals and hands-on management, but we believe the group’s current valuation has priced in its near-term growth prospects. Forecasts and Valuation FY Jun (RM m) 2016A 2017F 2018F 2019F Valuation: Revenue 1,301 1,418 1,527 1,601 EBITDA 222 245 248 254 We downgrade the stock to HOLD with a higher TP of Pre-tax Profit 187 210 215 224 RM3.00, upon rolling forward our 12-month valuation base to Net Profit 137 155 159 166 2QCY18. Our TP is still pegged to 12x forward PE. Net Pft (Pre Ex.) 138 155 159 166 Net Pft Gth (Pre-ex) (%) 72.0 12.7 2.5 3.8 EPS (sen) 20.9 23.6 24.2 25.2 Key Risks to Our View: EPS Pre Ex. (sen) 21.0 23.6 24.2 25.2 Weaker-than-expected consumer spending and increasingly EPS Gth Pre Ex (%) 72 13 3 4 competitive industry landscape. Diluted EPS (sen) 21.0 23.6 24.2 25.2 Net DPS (sen) 11.5 11.5 10.0 10.0 At A Glance BV Per Share (sen) 71.3 83.4 97.6 113 PE (X) 15.8 13.9 13.6 13.1 Issued Capital (m shrs) 658 PE Pre Ex. (X) 15.7 13.9 13.6 13.1 Mkt. Cap (RMm/US$m) 2,165 / 506 P/Cash Flow (X) 12.3 12.0 12.0 11.6 Major Shareholders (%) EV/EBITDA (X) 8.5 7.4 6.9 6.4 Yong Pang Chaun Holdings Sdn Bhd 43.7 Net Div Yield (%) 3.5 3.5 3.0 3.0 Skim Amanah Saham Bumiputera 5.0 P/Book Value (X) 4.6 3.9 3.4 2.9 Free Float (%) 50.1 Net Debt/Equity (X) CASH CASH CASH CASH 3m Avg. Daily Val (US$m) 0.90 ROAE (%) 31.4 30.6 26.8 23.9 ICB Industry : Consumer Goods / Personal Goods Earnings Rev (%): 0 0 0 Consensus EPS (sen): 23.5 26.1 28.6 Other Broker Recs: B: 9 S: 0 H: 3 Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa:BC, PY Company Guide Padini Holdings WHAT’S NEW Within expectations Lower earnings despite strong topline growth: The group’s 1.5 sen/share special dividend declared. The group declared a 3QFY17 earnings dropped marginally (-1% y-o-y) to RM35m, third interim dividend of 2.5 sen/share and a special dividend although revenue grew by 9% on a y-o-y basis. Its earnings of 1.5 sen/share, bringing its dividend payout to date to 9 sen were mainly dragged by (1) lower GP margin of 41% (vs 42% per share. We are not particularly surprised by the declaration in 3QFY16) due to higher inventory costs, and (2) 12% of a special dividend, as we highlighted the likelihood of this increase in selling and distribution expenses during the in our previous write-up, given its strong financial quarter. We believe that the q-o-q performance does not performance. serve as a good comparison given that Padini’s business is Current valuation has priced in its growth prospects. The highly seasonal. stock has performed remarkably well, with its share price Topline growth remains commendable. The strong revenue rising 28% since our upgrade back in February. Following the growth was mainly driven by (1) strong sales growth in strong rally, the stock has exceeded our revised TP of existing stores, supported by its mix & match bundling and RM3.00. We continue to like Padini, given its solid one piece promotional strategies, and (2) additional three fundamentals and hands-on management, but we believe Padini Concept Store and four Brands Outlet stores in that the group’s current valuation has priced in its near-term operation, compared with 3QFY16. growth prospects. This brings 9MFY17 earnings to RM118m, accounting for Downgrade to HOLD. We downgrade the stock to HOLD with c.76% of our and consensus’ full-year projections. We keep a higher TP of RM3.00, upon rolling forward our 12 months our earnings estimates largely unchanged. valuation base to 2QCY18. Our TP is still pegged to 12x forward PE. Quarterly / Interim Income Statement (RMm) FY Jun 3Q2016 2Q2017 3Q2017 % chg yoy % chg qoq Revenue 342 427 374 9.2 (12.4) Cost of Goods Sold (200) (248) (220) 10.1 (11.3) Gross Profit 142 178 154 7.8 (14.0) Other Oper. (Exp)/Inc (96.0) (106) (108) 12.5 2.1 Operating Profit 46.4 72.7 45.5 (1.8) (37.4) 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 (0.1) 0.15 1.05 nm 610.9 Exceptional Gain/(Loss) 0.0 (0.2) (0.2) nm (6.8) Pre-tax Profit 46.3 72.7 46.4 0.3 (36.2) Tax (11.1) (18.3) (11.6) 4.1 (36.6) Minority Interest 0.0 0.0 0.0 nm nm Net Profit 35.1 54.4 34.8 (0.9) (36.0) Net profit bef Except. 35.1 54.6 35.0 (0.4) (35.9) EBITDA 55.2 81.9 55.2 (0.1) (32.6) Margins (%) Gross Margins 41.6 41.8 41.1 Opg Profit Margins 13.5 17.0 12.2 Net Profit Margins 10.3 12.8 9.3 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 Critical Factors 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 the waning popularity of its popular mix-and-match bundling strategy for Padini Concept Revenue growth (%) Stores (PCS). We believe that the group’s topline will continue to be sustained by full contributions from 13 stores opened in FY16 and the opening of another 14 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 expansion of the group’s rising star, Brands Outlet, 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 SSS growth (%) improve business scale, distribution network, and operating 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 Revenue growth from exports, consignment & others (%) implemented in PCS will eventually taper off, which could drag down its SSSG, given the slower-than-expected recovery in domestic consumer spending. Furthermore, potentially high cost of inventories and marketing costs could erode its margin. 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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