PADINI HOLDINGS - A decelerating growth trajectory

By AmResearch
18 October 2012


HOLD

Price RM1.89 

Fair Value RM2.00

We re-affirm our HOLD recommendation on Padini Holdings, with a lower fair value of RM2.00/share vs. RM2.57/share previously, based on a 10% discount to our DCF value, following a downward revision on earnings. Our fair value implies a PE of 12x on FY13F earnings.  

As a follow-up to our previous report – H&M a potential threat? – dated 8 October 2012, we have trimmed our earnings by 0.3%-9% for FY13F-FY15F to account for a more guarded outlook of the successful entry of H&M. We have lowered our turnover per store assumption by 1%-7% and same store 

growth assumption to circa 8%-13%. We now estimate FY13F earnings to grow by 17% to RM111mil riding on five new stores that opened in May FY12 and a further 10% in FY14F to RM120mil. 

H&M has been very well received despite its two stores in the Klang Valley having been opened for only 2-3 weeks. Underpinned by high floor space requirements, preferably in high traffic location, H&M’s expansion could be somewhat limited for now until the window for availability of sufficient floor space exists. However, going forward, this may be a disadvantage to Padini’s Concept Store and even Uniqlo given H&M’s strong brand name as a crowd puller. This suggests that H&M could be a highly-sought after potential mini anchor tenant. 

• H&M’s entry will be a challenge to the retail landscape as competition is definitely bound to intensify within the Klang Valley driven by competitive pricing and fashionable product offerings.  More importantly, Padini’s stores located outside the Klang Valley, in our view, remains relatively safe underpinned by a strong franchise value and its acclaimed brand names. 

• We expect Padini’s 1Q results to be in line with our estimates, boosted by the nationwide sales with minimal impact from H&M so far. Following the upcoming strong spending in its 2Q due to the festive season, we reckon any earnings impact will only be visible in 2H due to a lesser distortion in earnings trend and 6 months’ is a good timeframe to capture the impact of new competition.   

• As H&M’s focus appears to be on apparels, we opine that Padini’s shoe line, Vincci, would not  be impacted, driven by:- (1) Wide selection of affordable shoes from party, casual to formal, catering to a broad range of clientele; (2) 50 new shoe designs are produced each month; and (3) Introduction of new designs each week in every store. These factors place Vincci as one of the top preferences among shoppers due to consistent fresh product appeal. 

• We believe Brands Outlet will remain as the growth driver for Padini. In line with management plans to penetrate Brands Outlet into the middle- to lowend markets, Padini recently opened Brands Outlet in Fahrenheit 88. We understand that management is currently eyeing three locations – Seremban and Miri for Brands Outlet and Miri for Concept Store.  

• Due to the changed retail landscape, earnings risk may be significant for Padini, particularly in the Klang Valley. As such, we have taken down our forward estimates on earnings. Share price is expected to oscillate around the current level until the market has fully digested the potential impact of H&M. On the flipside, Padini being geographically well-diversified nationwide could be able to offset the slowdown in spending within the Klang Valley and limit the downside risk.  

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