Padini to sustain earnings growth amid ringgit appreciation

KUCHING: Malaysia-based fashion retailer, Padini Holdings Bhd (Padini) is poised to sustain its earnings amid the strengthening of the ringgit.

AllianceDBS Research Sdn Bhd (AllianceDBS Research) in a report yesterday said in view of the recent ringgit appreciation, it will aid the company to lower its import cost of inventory and improve its profit margin in the next few quarters.

The research firm noted that Padini has sourced its products abroad since 2014.

It observed that the group sourced about 65 to 70 per cent of its products from China, which are denominated in renmimbi (RMB) and the remaining in US dollar.

As such, AllianceDBS Research pointed out that the ringgit’s recent recovery against both currencies will help to lower its inventory cost and improve its margin in the coming quarters

The research firm believed that the group will continue to report double digit year-on-year (y-o-y) growth for both topline and bottomline, supported by continued attractive mix and match bundling strategy and 11 new stores openings compared to same period last year.

Like other fashion retailers, AllianceDBS Research highlighted that same store sales growth (SSSG) and the number of outlets opened by the group in a financial year is key revenues driver for the group.

Thus, the research firm estimated that Padini’s financial year 2016 (FY16) ending June 2016 (SSSG) to be strong, supported by its popular mix and match bundling in Padini Concept Stores (PCS).

Besides that, AllianceDBS Research believed the company’s topline growth will be supported by new store openings in FY16.

Moreover, the research firm said Padini will continue to grow its Brands Outlet concept store which could benefit from downtrading.

It observed that consumers are increasingly looking for value propositions in the competitive apparel market.

Thus, the research firm noted the shift in consumer behaviour could bode well for the group?fs rising star, Brands Outlet’s expansion over the next two to three years.

Following a company’s briefing, the research said the company foresees huge untapped market in suburban cities for its Brands Outlet concept stores business.

Hence, AllianceDBS Research noted the group will focus on the Brands Outlet chain over the next three years to improve business scale, distribution network and operating leverage, which will strengthen its presence in the local apparel market.

It added the company’s management sees business opportunities in the huge underserved markets in Malaysia?fs suburban cities, which it believes will keep it busy over the next few years.

The research firm noted that once the company’s Brands Outlet concept store business hits saturation point, the company’s management will review its growth strategy, including expanding its product line and overseas business.

On another note, AllianceDBS Research was concerned about the popularity of Padini’s mix and match bundling strategy implemented in PCS.

The research firm opined that the popularity would eventually taper off, which could drag down Padini’s SSSG, given the slower-than-expected recovery in domestic consumer spending.

In the meantime, AllianceDBS Research observed that the company’s financial position remained strong and the group is in a net cash position.

It pointed out that the net cash position has allowed the group to sustain its dividend policy of at least 10 sen per share, and undertake outlet expansion plan without stretching its balance sheet.

The research firm gathered that the company’s management is committed to pay out a minimum dividend per share (DPS) of 10 sen over the next few years, even if earnings prospects remain sluggish, as a result of its strong cash-generating capability and net cash position.

Therefore, AllianceDBS Research believed that the group is on track to meet its revised net profit forecast of RM120 million for FY16.

At the same time, the research firm also revised upward its FY16 to FY18 earnings estimates for Padini by less than five per cent to reflect the potentially higher SSSG.

It upgraded Padini’s share price to a ‘buy’ recommendation, valuing its shares with a fair value of RM2.25 per share based on a forecast price earnings (PE) target of 12 times as it rolled forward its 12-month valuation basis to first quarter 2017 (1Q17).

 

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