Version 7 Bloomberg: PAD MK Reuters: PDNI.KL Refer to important disclosures at the end of this report Malaysia Equity Research 28 Nov 2016 HOLD (Downgrade from Buy) Last Traded Price ( 25 Nov 2016): RM2.82 (JCI : 5,122.10) Price Target 12-mth mth: RM2.95 (4% upside) (Prev RM2.95) Shariah Compliant: Yes Potential Catalyst: Stronger than exepected SSSG Where we differ: In line with consensus Analyst King Yoong CHEAH +60 32604 3908 cheahky@alliancedbs.com Not everything fits well Getting pricey now. We downgrade our recommendation for (Padini) to HOLD. We are taking a more cautious stance on the stock as we view that the group s stellar share price performance and its current valuation have priced in its near term growth prospects. Furthermore, its profit margin may continue to be under pressure due to the weak Ringgit. As such, we view the stock to be fairly valued at this juncture. What s New 1QFY17 earnings below expectations, dragged by sharp decline in margins Margins could continue to be under pressure due to weak Ringgit Downgrade to HOLD with RM2.95 TP Price Relative Forecasts and Valuation FY Jun (RM m) 2015A 2016F 2017F 2018F Revenue 978 1,301 1,412 1,476 EBITDA 142 221 240 236 Pre-tax Profit 112 187 211 211 Net Profit 80.2 137 156 156 Net Pft (Pre Ex.) 80.2 137 156 156 Net Pft Gth (Pre-ex) (%) (11.8) 71.4 13.4 0.3 EPS (sen) 12.2 20.9 23.7 23.8 EPS Pre Ex. (sen) 12.2 20.9 23.7 23.8 EPS Gth Pre Ex (%) (12) 71 13 0 Diluted EPS (sen) 12.2 20.9 23.7 23.8 Net DPS (sen) 10.0 11.5 10.0 10.0 BV Per Share (sen) 61.6 68.4 82.1 95.8 PE (X) 23.1 13.5 11.9 11.9 PE Pre Ex. (X) 23.1 13.5 11.9 11.9 P/Cash Flow (X) 9.7 21.0 11.6 10.7 EV/EBITDA (X) 11.6 7.6 6.7 6.4 Net Div Yield (%) 3.5 4.1 3.5 3.5 P/Book Value (X) 4.6 4.1 3.4 2.9 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 20.2 32.1 31.5 26.7 Earnings Rev (%): 0 0 0 Consensus EPS (sen sen): N/A 23.3 25.5 Other Broker Recs: B: 7 S: 0 H: 4 Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P Not a fashionable quarter. Despite strong topline growth (+15% y-o-y), the group reported unexciting 1QFY17 earnings of RM28m (-10.1% y-o-y), only meeting 19% of our/consensus full year forecasts. The uninspiring results were mainly dragged by lower than expected gross profit margin due to (1) sales promotions, and, (2) more expensive merchandise brought in. We are maintaining our earnings forecasts for now, pending our upcoming meeting with management. GP margin could continue to come under pressure due to weak Ringgit. The group sources about 70% of its products from China, denominated in RMB, and the remainder mainly in USD. As such, the ringgit s persistent weakness against both currencies could continue to increase its inventory cost and put downward pressure on its margins in the coming quarters. Valuation: The stock has performed remarkably well, with its share price rising >100% since our upgrade in August 2015. In view of its strong share price performance and downside risk to its margins, we believe the group s current valuation has priced in its near term growth prospects. We downgrade our recommendation to HOLD with an unchanged RM2.95 TP pegged to 12x forward PE. Key Risks to Our View: Weaker-than-expected consumer spending and increasingly competitive industry landscape. At A Glance Issued Capital (m shrs) 658 Mkt. Cap (RMm/US$m) 1,855 / 416 Major Shareholders (%) Yong Pang Chaun Holdings Sdn Bhd 43.7 Skim Amanah Saham Bumiputera 5.0 icapital.biz 3.5 Free Float (%) 50.1 3m Avg. Daily Val (US$m) 0.42 ICB Industry : Consumer Goods / Personal Goods Refer to important disclosures at the end of this report ed: BC / sa: BC
WHAT S NEW Not a fashionable quarter Below expectations. Despite strong topline growth (+15% y- o-y), the group reported unexciting 1QFY17 earnings of RM28m (-10.1% y-o-y), only meeting 19% of our/consensus full year forecasts. The uninspiring results were mainly dragged by lower than expected gross profit margin. We believe that the q-o-q review does not serve as a good comparison as Padini s previous quarter was boosted by pre- Raya festive sales. Topline- still strong... The strong revenue growth y-o-y was mainly driven by (1) strong sales growth in existing stores supported by its mix & match bundling and one piece promotional strategies, and (2) additional 5 Padini Concept Store outlets and 9 Brands Outlet stores in operation compared with 1QFY16..but GP G P margin weakened significantly. Nonetheless, gross profit (GP) margin fell from 46% in 1QFY16 to 41% in 1QFY17, mainly dragged by (1) sales promotions, and (2) more expensive merchandise brought in. GP margin could continue to come under pressure due to persistent Ringgit weakness. The group sources about 70% of its products from China, which are denominated in RMB, and the remainder mainly in USD. As such, the ringgit s persistent weakness against both currencies may continue to increase its inventory cost and put downward pressure on its margin in the coming quarters. Dividend payout in line. The group declared a second dividend per share of 2.5sen for 1QFY17, which is within our 10sen DPS forecast for FY17. We are maintaining our earnings forecasts for now, pending our upcoming meeting with management. Downgrade to HOLD with RM2.95 TP. The stock has performed remarkably well, with its share price rising >100% since our upgrade in August 2015. We believe that the group s current valuation has priced in its near term growth prospects, we downgrade our recommendation to HOLD with an unchanged RM2.95 TP pegged to 12x forward PE. Quarterly / Interim Income Statement (RMm) FY Jun 1Q2016 4Q2016 1Q2017 % chg yoy % chg qoq Revenue 270 349 310 15.0 (11.1) Cost of Goods Sold (145) (209) (182) 25.2 (13.2) Gross Profit 125 140 129 3.2 (7.9) Other Oper. (Exp)/Inc (80.5) (88.6) (89.0) 10.5 0.5 Operating Profit 44.2 51.1 39.6 (10.3) (22.5) 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 0.21 0.50 0.0 nm nm Exceptional Gain/(Loss) (0.1) 0.0 0.0 nm nm Pre-tax Profit 44.3 51.6 39.6 (10.6) (23.3) Tax (12.5) (14.2) (11.0) (11.8) (22.5) Minority Interest 0.0 0.0 0.0 nm nm Net Profit 31.8 37.4 28.6 (10.1) (23.5) Net profit bef Except. 31.9 37.4 28.6 (10.3) (23.5) EBITDA 52.2 60.6 48.7 (6.6) (19.6) Margins (%) Gross Margins 46.2 40.0 41.5 Opg Profit Margins 16.4 14.6 12.8 Net Profit Margins 11.8 10.7 9.2 Source of all data: Company, AllianceDBS Page 2
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 1%, 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 contributions from 13 stores opened in FY16 and the opening of another 15 stores slated for FY17. Total retail floor space (k sq ft) Revenue growth (%) 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 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 down its SSSG, given the slower-than-expected recovery in domestic consumer spending. Furthermore, the group sources about 65-70% of its products from China, which are denominated in RMB, and the remainder mainly in USD. Given the ringgit's depreciation against both currencies, we expect the group s margins to continue to come under pressure. SSS growth (%) Revenue growth from exports, consignment & others (%) Revenue growth from new floor spaces (%) Page 3
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. Share Price Drivers: Stable margins key share price e driver. Margins have been dragged by (1) aggressive sales campaigns to drive sales and maintain market leadership, (2) the group s plans to absorb the 6% GST in the near term, and (3) more expensive imported merchandise due to the weaker ringgit. Leverage & Asset Turnover (x) Capital Expenditure Sustaining high dividend payout. Management is committed to pay out a minimum DPS of 10 sen over the next few years, even if earnings prospects remain sluggish, thanks to its (1) strong cash-generating capability, and (2) net cash position. Key Risks: Competitive sector. Padini continues to face strong competition from a large pool of retail brands in Malaysia. Prolonged slump in consumer sentiment. Although the group has so far benefited from downtrading, a prolonged slump in consumer sentiment could dampen discretionary spending. ROE (%) Company Background Padini is a 43-year-old Malaysia-based fashion retailer offering clothing, accessories and shoes under the brands of Padini, Vincci, Seed, Miki, Padini Authentic, P&Co, PDI etc. Forward PE Band (x) PB Band (x) Page 4
Key Assumptions FY Jun 2014A 2015A 2016F 2017F 2018F Total retail floor space (k sq ft) 848 965 1,133 1,233 1,313 Revenue growth (%) 9.69 12.9 33.0 8.51 4.47 SSS growth (%) 4.85 2.21 9.60 0.89 0.50 Revenue growth from exports, (2.2) 0.34 1.34 (1.1) 0.26 Revenue growth from new 7.06 10.3 13.9 9.34 6.95 Income Statement (RMm) FY Jun 2014A 2015A 2016F 2017F 2018F Revenue 866 978 1,301 1,412 1,476 Cost of Goods Sold (466) (556) (759) (819) (857) Gross Profit 400 422 543 593 620 Other Opng (Exp)/Inc (276) (311) (356) (384) (413) Operating Profit 124 111 187 208 207 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc 1.78 0.40 0.21 2.48 4.66 Exceptional Gain/(Loss) 0.0 0.0 (0.1) 0.0 0.0 Pre-tax Profit 126 112 187 211 211 Tax (34.8) (31.6) (49.3) (54.8) (54.9) Minority Interest 0.0 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 90.9 80.2 137 156 156 Net Profit before Except. 90.9 80.2 137 156 156 EBITDA 148 142 221 240 236 Growth Revenue Gth (%) 9.7 12.9 33.1 8.5 4.6 EBITDA Gth (%) 6.0 (3.7) 55.9 8.2 (1.4) Opg Profit Gth (%) 5.8 (10.1) 67.4 11.6 (0.8) Net Profit Gth (Pre-ex) (%) 6.1 (11.8) 71.4 13.4 0.3 Margins & Ratio Gross Margins (%) 46.2 43.2 41.7 42.0 42.0 Opg Profit Margin (%) 14.3 11.4 14.3 14.7 14.0 Net Profit Margin (%) 10.5 8.2 10.6 11.0 10.6 ROAE (%) 23.5 20.2 32.1 31.5 26.7 ROA (%) 16.0 13.7 21.8 21.8 19.0 ROCE (%) 20.0 17.8 29.3 29.0 24.6 Div Payout Ratio (%) 83.2 82.0 55.1 42.2 42.1 Net Interest Cover (x) NM NM NM NM NM Page 5
Quarterly / Interim Income Statement (RMm) FY Jun 1Q2016 2Q2016 2016 3Q2016 4Q2016 1Q2017 Revenue 270 340 342 349 310 Cost of Goods Sold (145) (204) (200) (209) (182) Gross Profit 125 136 142 140 129 Other Oper. (Exp)/Inc (80.5) (91.0) (96.0) (88.6) (89.0) Operating Profit 44.2 44.9 46.4 51.1 39.6 Net Interest (Exp)/Inc 0.21 (0.4) (0.1) 0.50 0.0 Exceptional Gain/(Loss) (0.1) 0.0 0.0 0.0 0.0 Pre-tax Profit 44.3 44.5 46.3 51.6 39.6 Tax (12.5) (11.5) (11.1) (14.2) (11.0) Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Profit 31.8 33.1 35.1 37.4 28.6 Net profit bef Except. 31.9 33.1 35.1 37.4 28.6 EBITDA 52.2 53.5 55.2 60.6 48.7 Growth Revenue Gth (%) 21.5 26.3 0.6 1.9 (11.1) EBITDA Gth (%) 75.4 2.5 3.3 9.8 (19.6) Opg Profit Gth (%) 101.6 1.8 3.2 10.2 (22.5) Net Profit Gth (Pre-ex) (%) 74.4 3.7 6.2 6.5 (23.5) Margins Gross Margins (%) 46.2 39.9 41.6 40.0 41.5 Opg Profit Margins (%) 16.4 13.2 13.5 14.6 12.8 Net Profit Margins (%) 11.8 9.7 10.3 10.7 9.2 Balance Sheet (RMm) FY Jun 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 109 123 135 130 121 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 10.8 12.5 11.6 10.9 10.2 Cash & ST Invts 171 246 209 282 374 Inventory 222 169 222 258 270 Debtors 55.2 50.6 77.1 89.9 94.0 Other Current Assets 0.95 1.40 1.40 1.40 1.40 Total Assets 569 603 656 772 871 ST Debt 37.2 26.5 15.0 15.0 15.0 Creditor 110 138 158 184 193 Other Current Liab 11.5 11.8 11.8 11.8 11.8 LT Debt 15.0 12.5 12.5 12.5 12.5 Other LT Liabilities 7.39 8.00 8.00 8.00 8.00 Shareholder s Equity 388 406 450 540 631 Minority Interests 0.0 0.0 0.0 0.0 0.0 Total Cap. & Liab. 569 603 656 772 871 Non-Cash Wkg. Capital 157 70.7 130 153 161 Net Cash/(Debt) 119 207 181 254 347 Debtors Turn (avg days) 22.1 19.7 17.9 21.6 22.7 Creditors Turn (avg days) 82.1 86.4 74.8 79.3 83.2 Inventory Turn (avg days) 150.9 135.9 98.5 111.1 116.5 Asset Turnover (x) 1.6 1.7 2.1 2.0 1.8 Current Ratio (x) 2.8 2.6 2.7 3.0 3.4 Quick Ratio (x) 1.4 1.7 1.5 1.8 2.1 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 79.7 107.3 152.1 90.9 72.7 Z-Score (X) 9.8 9.3 9.8 9.1 8.8 Page 6
Cash Flow Statement (RMm) FY Jun 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 126 112 162 211 211 Dep. & Amort. 23.6 30.6 30.7 31.3 29.5 Tax Paid (35.6) (33.4) (42.2) (54.8) (54.9) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. (66.7) 75.1 (59.3) (23.3) (7.5) Other Operating CF 4.96 7.71 (3.1) (3.6) (5.8) Net Operating CF 52.0 192 88.3 160 173 Capital Exp.(net) (41.6) (41.8) (41.8) (25.0) (20.0) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF (57.3) (31.8) 3.11 3.58 5.76 Net Investing CF (98.9) (73.6) (38.7) (21.4) (14.2) Div Paid (75.7) (65.8) (75.7) (65.8) (65.8) Chg in Gross Debt 13.7 (16.0) (11.5) 0.0 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF 0.0 0.0 0.0 0.0 0.0 Net Financing CF (62.0) (81.8) (87.2) (65.8) (65.8) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash (109) 36.5 (37.6) 73.2 92.6 Opg CFPS (sen) 18.0 17.7 22.4 27.9 27.4 Free CFPS (sen) 1.57 22.8 7.07 20.6 23.2 Target Price & Ratings History Source: AllianceDBS Analyst: King Yoong CHEAH Page 7
DISCLOSURE Stock rating definitions STRONG BUY - > 20% total return over the next 3 months, with identifiable share price catalysts within this time frame BUY - > 15% total return over the next 12 months for small caps, >10% for large caps HOLD - -10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps FULLY VALUED - negative total return > -10% over the next 12 months SELL - negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame Commonly used abbreviations Adex = advertising expenditure EPS = earnings per share PBT = profit before tax bn = billion EV = enterprise value P/B = price / book ratio BV = book value FCF = free cash flow P/E = price / earnings ratio CF = cash flow FV = fair value PEG = P/E ratio to growth ratio CAGR = compounded annual growth rate FY = financial year q-o-q = quarter-on-quarter Capex = capital expenditure m = million RM = Ringgit CY = calendar year M-o-m = month-on-month ROA = return on assets Div yld = dividend yield NAV = net assets value ROE = return on equity DCF = discounted cash flow NM = not meaningful TP = target price DDM = dividend discount model NTA = net tangible assets trn = trillion DPS = dividend per share NR = not rated WACC = weighted average cost of capital EBIT = earnings before interest & tax p.a. = per annum y-o-y = year-on-year EBITDA = EBIT before depreciation and amortisation PAT = profit after tax YTD = year-to-date Page 8
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Additional information is, subject to the overriding issue of confidentiality, available upon request to enable an investor to make their own independent evaluation of the information contained herein. Wong Ming Tek, Executive Director Published by AllianceDBS Research Sdn Bhd (128540 U) 19th Floor, Menara Multi-Purpose, Capital Square, 8 Jalan Munshi Abdullah, 50100 Kuala Lumpur, Malaysia. Tel.: +603 2604 3333 Fax: +603 2604 3921 email : general@alliancedbs.com Page 9