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TA SecuritiesA Member of the TA Group

I N I T I A T I O N C O V E R A G E

Monday, June 20, 2016

FBMKLCI: 1,624.18

MENARA TA ONE, 22 JALAN P. RAMLEE, 50250 KUALA LUMPUR, MALAYSIA TEL: +603-20721277 / FAX: +603-20325048 Sector: Consumer

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Padini Holdings Berhad TP: RM2.95 (+29%)

Fashionably Attractive Valuation Last Traded:RM2.28 THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY* BUY

TA Research Team Coverage

Tel: +603-2072 1277 ext. 1264

[email protected]

www.taonline.com.my

We initiate coverage on Padini Berhad with a Buy recommendation and a target

price of RM2.95 based on 14x CY17 EPS. We believe the group deserves to trade

close to its 5-year historical peak valuation as we reckon that Padini is in a sweet

spot for down-trading by consumers and the share price is poised for a

continuous re-rating, driven by multi-year earnings expansion ahead.

Fundamentals are strongly underpinned by 1) strong brands names, 2) growing

value-for-money segment via its Brands Outlets stores, 3) well-managed

financials, and 4) impressive ROE compared to its industry peers. In addition,

Padini is also a good dividend play, offering attractive FY17-FY19 yields of 6% to

7%.

Investment Thesis

1. Strong brand name and customer data base domestically;

2. Proven ability and track record;

3. Strong in-house designing team;

4. Proven strategy - Outsourcing manufacturing;

5. Clean balance sheet; and

6. Venturing into e-commerce

We forecast Padini’s earnings to grow by 54%/9.1%/9.5% for FY16/17/18,

underpinned by following assumptions:

� 15%/14%/12% growth in retail floor space for FY16/17/18 respectively;

� Same-store-sale growth of 3%/3%/3%% for FY16/17/18 respectively;

� Dividend pay-out of 67%/67%/65% of FY16/17/18 earnings.

Earnings Summary

FYE June 30 (RM mn) 2014A 2015A 2016E 2017F 2018F

Revenue 866.3 977.9 1,242.3 1,421.1 1,604.7

EBITDA 147.6 142.0 195.7 211.6 229.4

EBITDA Margin (%) 17.0 14.5 15.8 14.9 14.3

PBT 125.7 111.8 171.3 186.9 204.6

Net Profit 90.9 80.2 123.3 134.6 147.3

EPS (sen) 13.8 12.2 18.7 20.5 22.4

PER (x) 10.6 15.4 12.3 11.3 10.3

DPS (sen) 11.5 10.0 12.0 13.0 14.0

Div. Yield (%) 7.9 5.3 5.2 5.6 6.1

Source: TA Research

Share Information

Bloomberg Code Pad MK

Stock Code 7052

Listing Main Market

Share Cap (mn) 657.9

Market Cap (RMmn) 1,500.0

Par Value 0.10

52-wk Hi/Lo (RM) 2.47 / 1.27

12-mth Avg Daily Vol ('000 shrs) 1,361.4

Estimated Free Float (%) 56.3

Beta 0.6

Major Shareholders (%)

43.7

Forecast Revision

2016E 2017F

Forecast Revision (%) 0.0 0.0

Net Profit (RM mn) 123.3 134.6

Consensus 128.9 141.9

TA's / Consensus (%) 95.7 94.8

Previous Rating

Financial Indicators

2016E 2017F

Net Gearing Net Cash Net Cash

ROE (%) 29.4 29.1

ROA (%) 19.2 18.7

NTA/Share (RM) 0.7 0.7

Price/NTA (x) 3.4 3.1

Share Performance (%)

Price Change Padini FBM KLCI

1 mth (3.2) (0.3)

3 mth 14.2 (5.4)

6 mth 15.9 (1.2)

12 mth 71.3 (5.7)

Yong Pang Chaun Holdings Sdn Bhd

Not Rated

(12-Mth) Share Price relative to the FBM KLCI

Source: Bloomberg

TA SecuritiesA Member of the TA Group 20-Jun-16

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1.0 Company Background

1.1 Company’s History

Padini Holdings Berhad is a 45-year old Malaysian-based fashion retailer, offering

clothing, accessories and shoes for women, men and children. Padini’s story began in

1971 after Hwayo Garments Manufactures Company was incorporated to

manufacture and wholesale ladies garments to departmental stores in Malaysia. Then,

Home Stores was formed as a holding company in 1991 and was later renamed as

Padini Corporation Sdn Bhd in May 1992, and Padini Holdings Group in 1995. In

1998, Padini listed on the Second Board of Bursa Malaysia and was then transferred to

the Main Board (now Main Market of Bursa Malaysia) on 28 July 2004.

The group has since transformed into a prominent clothing retailer with significant

presence in the Malaysian retail market. Under its belt, Padini’s brands include 1)

Vincci & Vincci+ Vincci Accesories, 2) Seed, 3) Padini Authentics, 4) PDI, 5) Padini, 6)

P&Co, 7) Miki Kids, 8) Miki Baby, and 9) Tizio. These brands are owned by 5 wholly-

owned trading subsidiaries Vincci Ladies’ Specialties Centre, Padini Corporation, Seed

Corporation, Mikihouse Children’s Wear and Yee Fong Hung (Malaysia) (see Figure 1).

At the moment, Padini operates 130 retail stores in Malaysia, which consists of 52

single-brand standalone stores, 39 Padini Concept Stores (PCS) and 39 Brands Outlet

(BO) stores. On top of that, Padini also markets its products via a network of 80

consignment stores throughout the nation. Total gross floor area operated by the

group is approximately 1,130.7k square feet, out of which 56% or 635k square feet

are for PCS, and 37% or 416.2k square feet for BO stores, respectively. The remaining

area is covered by single-brand stores.

Humble beginning in 1971

Figure 1: Corporate Structure

Padini Holdings Berhad

Padini Corporation Sdn Bhd (100%)

Yee Fong Hung Sdn Bhd (100%)

Padini Dot Com Sdn Bhd (100%)

The New World Garment Manufacturers Sdn Bhd

(100%)

Mikihouse Childrens Wear Sdn Bhd (100%)

Vincci Ladies Specialties Centre Sdn Bhd (100%)

Padini International LTD (HK) (100%)

Vincci Holdings Sdn Bhd (100%)

Seed Corporation Sdn Bhd (100%)

Source: Company, TA Research


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1.2 Key Management

At the helm of the group is Mr. Yong Pang Chaun, who is the group’s Managing

Director. He set up the company’s first subsidiary in 1971 to manufacture ladies

fashion. He has been instrument in manoeuvring Padini’s expansions throughout the

years. His ability to analyse fashion trends and keep abreast of changes in market

conditions and consumers’ preferences has contributed to the success of Padini.

Today, he oversees the group’s strategies and plans for the future.

Most of Padini’s key management personnel have been with the group for more than

10 years. This has provided a well-balanced mixture of experiences and expertise,

which is important in the fast-changing fashion industry.

Figure 2: Key Management

Name Position

Chia Swee Yuen Independent Non-Executive Director

Yong Pang Chaun Managing Director

Chan Kwai Heng Executive Director

Cheong Chung Yet Executive Director

Ching Chin Lin Executive Director

Yong Lai Wah Executive Director

Foo Kee Fatt Independent Non-Executive Director

Lee Peng Khoon Senior Independent Non-Executive Director

Yeo Sok Hiang Executive Director

Andrew Yong Tze How Alternate Director

Source: Company, TA Research

Shareholding Structure

Mr Yong and family own c.44% stake in Padini. In fact, Mr Yong and family are the

only substantial shareholders, holding more than 5% share in the group.

Family-owned business

2.0 Industry Analysis - Porter’s 5 Forces (see Appendix A)

The retail market in Malaysia grew at a CAGR of 4.5% from RM129.8bn in 2007 to

177.1bn in 2014. According to the Department of Statistics, the working population

(15 to 64 years) in Malaysia has increased to 67.3% in 2010 from 62.8% in 2000,

which augurs well for the retail industry in Malaysia. Note that this particular

segment is deemed to have a high propensity to spend as compared to other classes.

As far as competition is concerned, we believe the competition level is moderate in the

fashion retail industry in Malaysia (see Appendix A).

Figure 3: Porter’s 5 Forces

Source: TA Research

Buyer Power:

High

Competiveness

of Rivalry:

Moderate

Barriers of

Entry:

Moderate

Threat of

Substitution:

Low

Supplier

Power:

Moderate

Malaysia’s

Fashion

Industry


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3.0 Investment Thesis

3.1 Early Presence in Malaysia Retail Market

Padini’s early presence in the domestic retail market brings added advantage to the

group. Strong foothold with the history stretched for more than 45 years, Padini has a

strong position in the domestic retail scene and well-established customer base, thus

granting Padini the extra edge in expanding its market share. The group has one of the

most robust retail networks as compared to many of international brands, which only

emerged in a few first-tier cities nationwide. Furthermore, with well-known brand

name, Padini will be able to cushion any downturn in Malaysia’s retail fashion

industry.

3.2 Superb Track Record

Since listing in 2005, Padini’s revenue has achieved a superb track record, with

uninterrupted growth revenue over the past 10 years. Revenue CAGR was 15% over

the period, while net profit CAGR was higher at 16%. Importantly, the revenue

growth has not come at the expense of margin erosion, which the group has

successfully to keep its PBT margin at 13%. Historically, Padini demonstrated a solid

performance to withstand the impact of financial crisis in 1998 and 2008, where

revenue grew 10% and 21% respectively.

3.3 Strong in-house Designing Team.

What differentiates Padini and textile players is that the group has its own designing

team to study the fast-changing trends in the fashion industry. This holds a steady

control over the most critical part of the value chain and allows Padini to focus on

other vital processes in the business such as marketing and branding, inventory

management, and expansion of its retail network.

3.4 Proven Strategy - Outsourcing Manufacturing

Padini has emulated the strategy of leading fashions players by contracting out the

asset-heavy manufacturing segment of its operations. By detaching its factories, the

group shadows the established tactic of the likes of Nike, Calvin Klein, and Tommy

Hilfiger. This allows the group to get better grip on pricing for its products. Also, this

provides Padini a very extensive products ranges for its customers, overlaying all

market segments, from low to mid-end, with the exclusion of luxury market.

The group’s offers products for middle income earners through its brands such as

Padini, Seed, and Vincci+, while Brands Outlets (BO), Vincci, and Padini Authentics

offer value-for-money garments for lower income consumers. In terms of customer’s

age groups, Padini targets consumers from 5 years old to 45 years old. In short, the

diverse product lines help the group to extend its reach to cover a larger slice of the

retail pie. Furthermore, by selling its own brands, Padini enjoys healthier profit ratios

than other players that only dispense 3rd party merchandises.

Experience is the best teacher

Superb Track Record

Strong in-house designing team

Proven strategy, allowing to reach

greater portion of the pie


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Figure 4: Padini’s Historical Revenue Trend

0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

2011A 2012A 2013A 2014A 2015A

Revenue from Continuing Operations

Source: TA Research

3.5 Clean Balance Sheet

Padini has a strong balance sheet with RM0.2mn net cash, resulting from the adoption

of asset-light business model. Approximately 80% of the group’s total assets are

current assets, out of which 40% comprises inventory. We believe that management is

deliberately in keeping high level of inventory to avoid any production hiccups that

may cause interruptions to its operations. The high level of inventory is also a

requirement for the business to keep up with it high inventory turnover of 110.1 days

(faster than average of 180 days).

Padini spent average of RM33mn per annum over the last 3 years in growing Brands

Outlets and Padini Concept Stores. Effectively, the group would normally spend about

RM200/sq. ft. on average for refurbishment of its Padini Concept Stores and

RM100/sq. ft. for its Brands Outlets stores. Looking forward, we estimate the group

will spend around RM30mn annually in capex for the next 3 years, which is

insignificant to its balance sheet.

With the large cash pile and low capex requirement, it would provide opportunity for

the group to expand or take on any new business ventures such as store opening, e-

commerce, overseas expansion in the future.

Strong balance sheet with a net

cash position

Undemanding capex

requirements

Net cash to help fuel store

expansions

3.6 Venturing into E-Commerce

The surge in online retailing in Malaysia for the past decades has opened significant

opportunity for the group to expand its business via online. The group launched its

online platform in November last year, with the brand name of www.padini.com. This

will help the group to tap into the ever-growing internet users. In Malaysia, the

internet penetration is still moderate as compared to other developed countries such

as Japan, and Singapore (see Figure 5). This suggests ample rooms for expansion for

the group in online retail business.

By venturing into e-commerce, we believe it would help the company to overcome the

shortage of front liners workforces in the industry. Having said that, the online store is

still at a start-up phase and needs some time to gain significant traction. Note that,

only selected merchandises from its existing outlets are currently sold online. Also,

there are no pricing discrepancies between its outlets and online store.

Piggyback on surging growth of e-

commerce


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Source: Internetworldstats.com / TA Research

Figure 5: Internet Penetration Rates

90.6%

82% 80.5%

67.5%

55.9%50.1% 49.5%

43.0%

30.0% 30.5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

4.0 Risks

4.1 Exposed to Raw Material Prices

Padini’s direct operational costs are the supplies of finished products by its

manufacturers. In other words the, increase in cotton prices will lead to higher

garment costs to Padini as manufacturers will usually pass on the costs to the

company. In the case of weakening Ringgit against Renminbi, the costs would escalate

further and will eat into company’s profitability if the group fails to pass on the cost to

consumers.

Having said that, Padini’s costs of purchase has been relatively stable over the past 5

years, accounting for 49% to 57% of its revenue. We attribute the stability to the

adaptive and flexible inventory management system adopted by Padini. Plus, purchase

orders are locked-in at the beginning of fixed agreements between Padini and

manufacturers, which will help to cushion the fluctuations in the cotton prices.

Our back-of-the-envelope calculation revealed that a 1% increase/decrease in costs of

goods sold rate will decrease/increase FY16 earnings by about 8%. Note that, cotton

prices have been moving in a sideways trend after falling approximately 70% from its

peak of USD213.7/lb. in 2011 to USD63.18/lb. in mid-Jun this year.

Favourable cotton price trend

Figure 6: Changes in Earnings vs Costs of Goods Sold

3% 2% 1% 0 -1% -2% -3%

Changes in Earnings (%) 23 15 8 0 -8 -15 -23

-30

-20

-10

0

10

20

30

Ch

an

ge

s in

Ea

rnin

gs

(%)

Source: TA Research


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Figure 7: Cotton Price Movement between 2011 to Jun 2016

Source: TA Research / Bloomberg

4.2 Shortage of Front-Liners

The ability to attract front-end retail staffs dictates the pace of Padini’s store

expansion plans besides the availability of rental spaces. Adequate numbers of

workforces bring smoothness in daily stores operation. The lack of interest from fresh

graduates, to take up sales jobs means another hurdle to ensure sufficient group of

professional employees.

4.3 Entry of Foreign Players

In recent years, the buoyant retail market in Malaysia has attracted foreign players. To

name a few, Uniqlo from Japan (2011), Bershka from Spain (2011), Cotton On from

Australia (2009) and Charles & Keith from Singapore (2008) have already made their

marks in the domestic retail industry. However, we believe the cut-throat rivalry

within the retail players is still controllable underpinned by growing market pie

resulting from rising consumers’ affluence.

Number of front-liners could be an

issue

Increasing number of foreign

players, blessing in disguise

Figure 8: Padini’s SWOT Analysis

Strengths Weakness

• Strong presence in most of retail segments

• Significant number of outlets in most

prominent shopping complexes

nationwide

• Clean balance sheet, net cash position

• Strong and diversified brand portfolio

• Established retailer with a long successful

track record

• Less penetration in export

market except in the Middle East

countries

Opportunities Threats

• Value for money segment is a growing

segment for retail industry in Malaysia

• Moderate internet penetration means

there are still rooms for e-commerce

retailing business

• Governments’ initiatives to further

enhance the retail and tourism sector

• Rising middle class population means

more potential customers for value for

money products

• Rising number of commercial property

• Slowdown and subdued growth

in global and domestic economy

• Customers spending pattern

dictates by government policies

(e.g.: GST implementation and

hike in interest rate)

• Sales driven by seasonal events

• High labour and rental costs

potentially affecting Padini’s

margins

• Entry of foreign players to the

domestic market

Source: TA Research


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5.0 Financial Highlights

5.1 Resilient Results

Padini registered an impressive 9MFY16 results, which saw its core net profit rose by

61.2% YoY to RM100mn on the back of strong growth in sales. The sales expanded by

26% YoY to RM952.3mn, lifted by 1) the Chinese New Year shopping season, 2)

maiden contribution from 13 new stores (5 Padini Concept Stores (PCS) and 8 Brands

Outlet stores), and 3) higher same-store-sale growth driven by aggressive year-round

promotions. Furthermore, the increase in profit was also attributable to lower

effective tax rate, which was 26% or 5 p.p. lower as compared to a year ago.

QoQ, revenue increased marginally by 0.6% QoQ to RM342.4mn as both quarters were

enhanced by the same catalyst, i.e. Chinese New Year shopping activities. On more

positive note, due to stronger MYR for the quarter as compared to 2QFY16, the gross

profit improved by 5% QoQ to RM142.3mn as stronger ringgit has led to lower cost of

sales.

On segmental breakdown, 3 out of 5 operating segments (Padini, Seed, and Yee Fong

Hung) recorded strong double digit growth (more than 20% YoY) in its revenue. The

restructuring plans adopted by the group for its Seed and Vincci has also started to

bear fruit. Seed and Vincci’s PBT expanded by fivefold and 49.2% YoY to RM6.2mn and

RM5.7mn respectively as compared to a year ago.

Going forward, we believe the group would be able to sustain the positive momentum

as Hari Raya shopping season will have an impact in the last quarter (April-Jun) of the

group’s financial year. Note that, normally, the 4th quarter will be the slowest quarter

for Padini. In addition, we also reckon that the new minimum wage policy, which will

be implemented on 1st July, would have a positive impact on Padini’s sales.

Record year earnings

underpinned by strong demand

and effective marketing strategy

Driven by festive season shopping

activities

Padini & Brands Outlets remains

the group main driver… Seed &

Vincci back in action

Further re-rating catalyst for the

group share price

5.2 Forecasts

All in, we are estimating a 3-year revenue and earnings CAGR of 12% and 10%

respectively for Padini. This is supported by its strong growth in the retail floor

space, which is expected to expand by a double digit 3-year CAGR of 11% in

FY17/FY20.

We also expect the net margin to be stable and sustainable at approximately 9% to

10% level moving forward, underpinned by stable operating cost per square feet.

Currently, we are estimating the operating expenses per square feet to around

RM340 to RM350 between FY17 and FY20 (see Figure 9).

Strong double-digit growth for its

top-line and bottom-line

Stable net margins

Figure 9: Operating Expenses per Square Feet

-10%

-5%

0%

5%

10%

15%

0.30

0.31

0.32

0.33

0.34

0.35

0.36

0.37

2012A 2013A 2014A 2015A

Operating Expenses per square feet (RM) Growth

Source: TA Research


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Figure 10: Padini’s Net Profit Margin

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2013 2014 2015 2016E 2017F 2018F 2019F 2020F

Source: TA Research

On average, we are estimating the Same-Store-Sales growth of 3% for both of its

signature stores, Padini Concept Stores and Brands Outlets stores for the next 3 years

(FY17-FY20). As for its consignment stores, management intends to reduce the

number of consignment outlets, given that this segment yield low margins. In our

forecast, we assume the number of consignment stores to be reduced to 17 outlets

from 80 outlets currently by FY20.

In terms of costs, we project costs of sales to range from 56% to 57% of the group’s

total revenue. This is higher than the 5-year historical average of 53% given our

MYR/RMB assumption of RM1.61 for FY17 and RM1.64 in FY18, which is lower than

the 5-years average of RM1.89.

On the dividend standpoint, the group had announced 2.5sen/share interim

dividends and 1.5sen/share special dividends in 3QFY16. Cumulatively, the group

had paid 9sen/share for 9MFY16. Our FCFE analysis indicates, after taking into

consideration the working capital and capital expenditure requirements, cash from

operation will be sufficient to maintain the dividends payment of over 50% for FY16-

18. Historically, the group had paid an average of 67% of its earnings as dividends.

Note that Padini does not have no formal dividend policy.

We project dividend payments of 12sen / share for FY16 to FY17, yield 5% to 6%.

This are higher than the industry average of 3.4% to 3.2% in FY16 and FY17,

respectively.

Same-store-sales growth

estimated to be situated

approximately 3% YoY for the

next 3-years

Attractive dividend yield, hence

making Padini a stock for dividend

play

6.0 Valuation

We value Padini at RM2.95/share based on 14x CY17 EPS. We believe Padini’s

deserves to trade close to its 5-year historical peak valuation of 15.5x underpinned by

1) strong 3-year earnings CAGR of 10% in FY17/FY20, 2) growing value-for-money

segment via its Brands Outlets stores, 3) well-managed financials, and 4) diminishing

investable retailers within consumer sector.

Our target PE of 14x is a lower than the industry average of 15.6x in FY17 (see Table

1). This is justifiable considering Padini market capitalisation is lower than peers’

average. Hence, we initiate coverage on Padini with a BUY recommendation.

Undemanding valuation making

Padini attractive to accumulate


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Table 1: Peers Comparison

2016 2017 2016 2017 2016 2017 2016 2017

BONIA CORPORATION BERHAD 0.56 451.5 14.2 11.5 (12.2) 22.8 6.7 7.7 2.0 2.1

AEON (M) BERHAD 2.70 3,790.8 26.7 23.5 6.3 13.9 7.0 7.7 1.3 1.4

AMWAY (M) BERHAD 8.98 1,476.2 21.2 19.8 8.7 7.1 39.0 39.8 4.1 4.5

PARKSON HOLDINGS BERHAD 0.82 858.4 11.5 7.8 226.4 47.9 1.4 3.6 7.1 5.4

Average 1,644.2 18.4 15.7 57.3 22.9 13.5 14.7 3.6 3.3

PADINI HOLDINGS BERHAD 2.27 1,493.5 11.0 10.3 23.8 7.1 28.5 27.6 5.2 5.0

VS

ROE (%) Net Dividend Yield (%)Company Name

Share

price

Mkt Cap

(MYR mn)

P/E (x) EPS Growth (%)

Source: TA Research

Figure 11: Padini 5 – Years PER Band

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

1/3

/20

11

1/5

/20

11

1/7

/20

11

1/9

/20

11

1/1

1/2

01

1

1/1

/20

12

1/3

/20

12

1/5

/20

12

1/7

/20

12

1/9

/20

12

1/1

1/2

01

2

1/1

/20

13

1/3

/20

13

1/5

/20

13

1/7

/20

13

1/9

/20

13

1/1

1/2

01

3

1/1

/20

14

1/3

/20

14

1/5

/20

14

1/7

/20

14

1/9

/20

14

1/1

1/2

01

4

1/1

/20

15

1/3

/20

15

1/5

/20

15

1/7

/20

15

1/9

/20

15

1/1

1/2

01

5

1/1

/20

16

1/3

/20

16

1/5

/20

16

1/7

/20

16

1/9

/20

16

1/1

1/2

01

6

1/1

/20

17

1/3

/20

17

1/5

/20

17

+1 STD

Mean

-1 STD

Source: TA Research


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Financial Summary (RMmn) Profit & Loss Balance Sheet

FYE June 30 (RM mn) 2015A 2016E 2017F 2018F 2019F FYE June 30 (RM mn) 2015A 2016E 2017F 2018F 2019F

Revenue 978 1,242 1,421 1,605 1,798 Non Current Assets

Adj. EBIT 111 171 186 203 223 PPE 123 130 135 140 145

EI 0 0 0 0 0 Others 13 13 13 13 13

D&A (31) (24) (25) (26) (27) Total Non-Current Assets 136 142 148 153 157

Reported PBT 112 171 187 205 226

Adj. PBT 112 171 187 205 226 Current Assets

Taxation (32) (48) (52) (57) (63) Inventories 169 215 246 276 312

Minority Interest 0 0 0 0 0 Trade and Other Receivables 51 64 74 83 93

Reported Net Profit 80 123 135 147 163 Cash and Cash Equivalents 137 149 179 221 246

Adj. Net Profit 80 123 135 147 163 Others 111 111 111 111 111

Adj. EPS (sen) 12 19 20 22 25 Total Current Assets 467 539 609 690 761

Dividend / Share (sen) 10 12 13 14 16

Div. Yield (%) 5 5 6 6 7 Total Assets 603 682 757 843 918

Cash Flow Equity

FYE June 30 (RM mn) 2015A 2016E 2017F 2018F 2019F Share Capital 66 66 66 66 66

Reserves 340 380 425 476 530

PBT 112 171 187 205 226 Shareholders' Equity 399 440 484 536 590

D&A 31 24 25 26 27 Others 6 6 6 6 6

Interst Expense 3 3 4 4 4 Total Equity 406 446 491 542 596

Interest Income (3) (3) (4) (5) (7)

Others 8 (1) (1) (1) (1) Non-Current Liabilities

Cash flow before WC 150 195 211 228 249 Borrowings 13 13 12 11 10

Others 8 8 8 8 8

Changes in WC Total Non-Current Liabilities 20 20 19 18 17

Change in Inventories 43 (46) (31) (29) (36)

Change in Receivables 5 (14) (9) (9) (10) Current Liabilities

Change Payable 28 23 27 31 24 Trade and Other Payables 142 165 192 223 247

Total Working Capital 75 (37) (13) (8) (22) Borrowings 26 41 46 51 49

Others 8 8 8 8 8

Income Tax Paid (33) (48) (52) (57) (63) Total Current Liabilities 177 215 247 283 304

Others 0 0 0 0 0

CFO 192 110 145 163 164

Total Equity and Liabilities 603 682 757 843 918

Investing Cash Flow

Capex (42) (30) (30) (30) (30) Ratios

Others (32) 3 4 5 7 FYE June 30 (RM mn) 2015A 2016E 2017F 2018F 2019F

CFI (74) (27) (26) (25) (23)

Valuations

Financing Cash Flow Reported PER (x) 15.4 12.3 11.3 10.3 9.3

Net Change in Borrowings (11) 15 4 4 (3) Core PER (x) 15.4 12.3 11.3 10.3 9.3

Dividends Paid (66) (83) (90) (96) (109) Div. Yield (%) 0.1 0.1 0.1 0.1 0.1

Finance Costs Paid 0 (3) (4) (4) (4) P/BV (x) 3.1 3.5 3.1 2.8 2.6

Others (5) 0 0 0 0 EV/EBITDA (x) 10.0 7.3 6.6 5.9 5.3

CFF (82) (71) (90) (96) (116) EV/EBIT (x) 12.8 8.3 7.5 6.7 6.0

EV/Sales (x) 1.5 1.1 1.0 0.8 0.7

FCF Yield (%) 10.1 5.7 8.3 9.9 10.2

Net change 40 12 29 42 25

Beginning cash 97 137 149 179 221 Profitability ratios

ROA (%) 13.7 19.2 18.7 18.4 18.5

Ending cash 137 149 179 221 246 ROE (%) 20.5 29.4 29.1 28.9 28.9

NTA/share (RM) 0.6 0.7 0.7 0.8 0.9

P/NTA (x) 3.1 3.5 3.1 2.8 2.6

Net Gearing (x) Net Cash Net Cash Net Cash Net Cash Net Cash

Liquidity ratios

Current Ratio (x) 2.6 2.5 2.5 2.4 2.5

Quick Ratio (x) 1.7 1.5 1.5 1.5 1.5

Interest Coverage (x) 39.0 52.7 47.6 48.5 52.8

Margin (%)

Gross Margin (%) 43.2 43.0 43.0 43.5 43.0

EBITDA Margin (%) 14.5 15.8 14.9 14.3 13.9

EBIT Margin (%) 11.4 13.8 13.1 12.7 12.4

Reported PBT Margin (%) 11.4 13.8 13.2 12.7 12.6

Reported Net Profit Margin (%) 8.2 9.9 9.5 9.2 9.0

Adj. Net Profit Margin (%) 8.2 9.9 9.5 9.2 9.0

Growth (%)

Revenue Growth (%) 12.9 27.0 14.4 12.9 12.0

Gross Profit Growth (%) 5.5 26.5 14.4 14.2 10.7

EBIT Growth (%) (10.1) 53.7 8.8 9.2 9.8

Reported PBT Growth (%) (11.0) 53.2 9.1 9.5 10.4

Adj. PBT Growth (%) (11.0) 53.2 9.1 9.5 10.4

Reported Net Profit Growth (%) (11.8) 53.7 9.1 9.5 10.4

Adj. Net Profit Growth (%) (11.8) 53.7 9.1 9.5 10.4


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Appendix A: Industry Analysis - Porter’s 5 Forces

2.1 Supplier Power

Due to the well-developed and competitive upstream service providers in the fashion

industry, the bargaining power of suppliers is kept at a moderate level. Similar to

international fashion retailers, even though the rights of design belong to Padini,

however, the manufacturing operations are outsourced to the original equipment

manufacturers (OEM). According to management, most of their products are

outsourced to OEM in southern and northern coastal of China. We reckon that, this

strategy allowing Padini to have more focus on their other business processes, which

are more pivotal in managing clothing lines such as marketing, branding, and creating

the latest design to match the ever-changing fashion trend. The group engages with

more than 10 OEM suppliers, currently. Management also mentioned that, they are

currently diversifying its manufacturing operations to other countries such as Sri

Lanka and Bangladesh in order to spread out the power of suppliers for a long run

benefit. High numbers of suppliers will help Padini in maintaining its costs of goods

sold, hence protecting its gross margin, moving forward.

Moderate bargaining power of

suppliers

2.2 Buyer Power

On the other hand, we believe that, the power of buyers is relatively high in the

fashion industry as compared to others due to the low switching costs. Moreover, the

consumers’ spending patterns are highly dependent on the general economic

condition. Having said that, we believe over the past few years, Padini has built the

trust among the consumers as one of the retailers that provides economical and

quality products. This brand loyalty is essential factor to soften the risks of high

bargaining power of its customers.

High bargaining power of buyers

2.3 Barriers of Entry

Generally, the barrier to enter the retail industry is moderate in line with the low

requirement of capex. However, new entrants would have limited access to the

distribution channels due to the preference brands name by commercial property

operators. The ability to build brand loyalty and deliver quality products are essential

factors in order to draw the crowd to shopping centers. These are some of the

characteristics that commercial property players closely monitor in their process of

selecting potential tenants.

Moderate barriers of entry

2.4 Competiveness of Rivalry

In recent years, the number of foreign retailers has increased with Uniqlo (from Japan

- 2011), Charles & Keith (from Singapore - 2008), and Cotton-on (from Australia -

2009) had made their mark in the Malaysia’s retail market. This has resulted in

mounting competition in the industry. In spite of such competition, we believe that,

the rivalry within the fashion retailers is still controllable due to the ever growing of

the fashion industry itself. We also expect that, Padini’s performance will not fade

away as the group is the most experienced retailer in the local scene. Market

knowledge and the successful history in Malaysia’s retail sector will help Padini to find

its niche and grow its business steadily, moving forward.

Adaptable level of competition in

the domestic retail scene

2.5 Low threat of Substitution

Garments and shoes are consider as a basic need for an individual. Due to the

increasing number of online retailers over the past years, making it easier to buy

apparel and shoes via online. This changed has increased the threat of substitution for

brick and mortar retailers. Usually, the fashion products that are sold online are

relatively cheaper compared to the traditional retailer. Knowing that the cost of doing

business via online is cheaper compared to having a physical store. With the climate

change in retail sector, Padini has launched its e-commerce platform last year to help

the group to maintain its competitiveness, thus lowering the threat of being

substituted by the products available through online.

Basic needs give comfort to

substitution exposure


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Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may

have an interest in the securities and/or companies mentioned herein.

for TA SECURITIES HOLDINGS BERHAD(14948-M)

(A Participating Organisation of Bursa Malaysia Securities Berhad)

Kaladher Govindan – Head of Research

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