Padini Holdings Bhd
(May 29, RM3.63)
Maintain buy with a higher target price of RM4.50: We consider Padini Holdings Bhd’s nine-month financial year 2019 (9MFY19) (June) results within our expectations, as we anticipate a stronger fourth quarter FY19 (4QFY19) ahead — boosted by the Hari Raya Aidilfitri festivities.

 
We continue to like its established brand equity, strategic presence throughout Malaysia, and sturdy balance sheet that enables regular dividend payouts. We also believe the stock deserves a valuation premium despite a lacklustre FY19 earnings growth, given the scarcity of sizeable syariah-compliant consumer stocks available.

Padini reported a 9MFY19 net profit of RM105.8 million (-12.6% year-on-year), which accounted for 63% and 72% of our and consensus full-year forecasts. We deem the results broadly within our expectations, given our anticipation of a strong 4QFY19 ahead — boosted by the Hari Raya Aidilfitri festivities.

9MFY19 revenue grew 5.5% to RM1.3 billion, which we believe was mainly driven by new store openings. Gross profit eroded 1.9 percentage points to 39.3% on higher inventory write-downs (RM5.8 million versus 9MFY18: RM4.6 million) and impact from sales tax and service tax adjustments.

The group declared a total dividend per share of 11.5 sen in FY19, unchanged from FY18. Post results, we made no major changes to our earnings forecasts.

Although our FY19 forecast implies a negative growth of 8%, we highlight that this comes from a high base after a three-year net profit compounded annual growth rate of 31%.

Hence, we believe earnings growth may not be the only angle for this stock. There is a scarcity of sizeable consumer retail stocks in Malaysia and as such, we believe Padini will continue to be pursued by investors seeking exposure to the local retail space.

This is premised on Padini’s established brand equity in Malaysia, sturdy balance sheet (net cash of RM354 million or 54 sen per share as at 3QFY19), and regular dividend payouts supported by strong cash flow generation. We highlight that this stock offers decent yields of more than 3%. — RHB Research Institute, May 29