Padini Holdings Bhd
(Nov 28, RM3.43)
Maintain hold with an unchanged fair value of RM3.75: Padini Holdings Bhd’s revenue for the first quarter of financial year 2020 (1QFY20) ended Sept 30, 2019 grew 2.5% year-on-year (y-o-y) mainly due to better sales of its existing stores as reflected in a same-store sales growth of 1% (0% in 1QFY19) which, we believe, was due to improved product offerings. Padini recently reshuffled its internal merchandising team to better cater to its customers’ needs. Its profit before tax (PBT) inched up 0.9% y-o-y, while its PBT margin was flattish at 8%.

Comparing 1QFY20 with 4QFY19, revenue sank 34.5% in the absence of festive periods. Padini recorded higher sales during the Hari Raya Aidilfitri festival in June 2019 and its nationwide five-day special sales promotion in 4QFY19. Its PBT tumbled 63.4% quarter-on-quarter (q-o-q), while its PBT margin dropped by 6.3 percentage points (ppts).

Padini’s gross margin grew 0.6ppt y-o-y and 1.7ppts q-o-q to 40.5%, which we believe was driven by a slightly stronger ringgit against the yuan (+1.3% y-o-y; +2.4% q-o-q).

In 1QFY20, Padini was affected by the impact of the implementation of the Malaysian Financial Reporting Standard 16 (MFRS 16). Under the MFRS 16, the group’s finance cost and depreciation increased by RM6.1 million and RM24.6 million respectively — more than the rental cost of RM26 million. The net impact on its PBT was RM4.8 million.

Padini’s effective tax rate dropped by 5.5ppts to 27% as the group utilised deferred tax assets amounting to RM1.9 million in 1QFY20.

We anticipate sales to improve sequentially due to seasonality factors, such as the Christmas season and year-end school holidays. However, we believe its long-term prospects will be challenging due to an unexciting domestic outlook, saturation of the fast-fashion industry and the full-year impact of the implementation of the sales and service tax. Padini also faces margin pressure from the impact of the MFRS 16. — AmInvestment Bank, Nov 28