Padini Holdings : Profit growth to continue in FY17F BUY

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Padini Holdings : Profit growth to continue in FY17F         BUY

Maintain BUY on Padini Holdings with a higher fair value of RM3.00/share vs. RM2.70/share previously. Our fair value for Padini is based on a FY17F PE of 13x. Padini's foreign shareholding is 25% currently. We have raised Padini's FY16F and FY17F earnings estimates by 7% and 11% respectively as EBIT margins and sales during the recent Raya festive period have been better-than-expected.  We remain positive on Padini’s prospects as sales are expected to remain resilient, supported by the affordable pricing of its products. We like Padini for its 1) strong brand recognition; 2) sterling earnings track record; 3) wide distribution network; and 4) dominant position in the retail and apparels industry.

We believe that Padini's earnings momentum would continue into FY17F underpinned by the opening of six new stores in the first half of the financial year. The six stores are expected to consist of three concept stores and three brand outlets. These stores include those that would be located in Sunway Velocity Mall, Design Village in Penang and AEON Melawati. We have assumed a sales growth per store of 12.9% in FY17F compared with 15.3% in FY16F. Same store sales growth was 18% YoY at the concept stores and 9% YoY at the brands outlets in 9MFY16. We expect Padini's pre-tax profit margins to improve in FY17F supported by the appreciation of the RM against the RMB. As such, we have raised our assumption of Padini's EBIT margins from 14.5% previously to 15.5% each in FY16F and FY17F. Since the beginning of the year, the RM has appreciated by 9.7% against the RMB. About 90% of Padini's inventories are sourced from suppliers in China. We believe that there is minimal threat from online boutiques as the selling prices of Padini's apparel at the physical stores are still attractive. Presently, Padini's online shop, which commenced operations in November 2015, generates less than RM100,000 of revenue. Padini's balance sheet is clean as reflected in the net cash per share of 24 sen as at end-March 2016. Free cash flows are estimated at 28 sen per share in FY17F compared with 21 sen per share in FY16F.

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