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BIMB SECURITIES RESEARCH

MARKET INSIGHT
PP16795/03/2013(031743)

Thursday, 19 July, 2012

Re-Initiate Coverage

Padini Holdings
Great Brand Comes with Great Value
Stock Data Bloomberg Ticker Market Cap Issued shares 52-week range (H) 52-week range (L) 3-mth avg daily volume Free Float Shariah Compliant PAD MK 1,217.1 Equity 657.9 1.88 0.82 1,669,835 47.6% Y Altman Z-score YTD price chg YTD KLCI chg Beta Major Shareholders Pang Chaun Yong Skim AmanahSaham Capital Dynamics Ass Bu 5.4 69.7% 4.4% 1.3 44.0% 5.0% 3.5%

Buy
Price Target Price RM1.92 (+14.2% upside)RM2.13
We are re-initiating our coverage on Padini Holdings with a BUY recommendation based on a target price of RM2.13 which is derived by pegging a PER of 12x over FY13 EPS of 17.8 sen. We believe Padini to enjoy solid earnings growth going forward due to (i) an aggressive outlet expansion by end FY12, (ii) Malaysias youthful population with high propensity to spend and (iii) positive outlook in the country retail industry. A regional brand. Padini is one of the very few Made in Malaysia retail brands that has foot prints across the region namely Thailand, Brunei, Saudi Arabia, the Philippines, Cambodia, Egypt, Oman, United Arab Emirates, Indonesia, Syria, Pakistan, Qatar, Bahrain and Morocco. Bountiful profits in store. Padini has been unrelenting in expanding its retail space every year. The number of stores will have a major impact to the Group as their sales growth is mainly generated from new expansion of gross floor area (new retail space). For FY12, Padini has budgeted about 74,000 sq ft gross floor for 2 Padini Concept Stores and 3 Brands Outlet stores by end of FY12. Positive retail outlook. The Distributive Trade Sector comprises of wholesale trade, retail trade and motor vehicles as the three main sub-sectors. Sales value of Distributive Trade sector in 1Q2012 increased to RM204.1bn or 9.2% as compared with 1Q2011. The retail trade sub-sector recorded the highest percentage growth in sales value circa. 10.7% or to RM9.1bn, followed by wholesale trade of 10.2% and motor vehicles with 2.6% as compared to the previous year. Proven track record. Padinis track record over the last 5 years had been impressive. During the period, the group has consistently delivered positive revenue and net profit CAGR of 15% and 22% respectively. As Padini targets mainly the younger generation, we believe the Groups growth momentum is set to continue supported by the increasing young population in the country. We expect Padini to register net profit of RM98.3m and RM117m for FY12 and FY13 respectively, mainly driven by outlet expansion and positive consumer sentiment. View & Valuation. We are re-initiating coverage on Padini Group Berhad with a Target Price of RM2.13 based on a 5year average PER Band of 12x over FY13 EPS of 17.8sen. This translates into potential total return of 14.2%, including the expected dividend yield of 3%. Re-initiate with a BUY recommendation.

Share Performance (%) Absolute vs. KLCI Financial Highlights FYE 30 June Revenue (RMm) EBIT Pre-tax profit Net Profit EPS (sen) EPS growth (%) PER (x) DPS (sen) Div. Yield (%) NTA/share (RM) EPS (sen) EBIT margin Pre-tax margin Effective tax rate ROE Growth ratios Turnover EBIT Pre-tax profit Net profit Share Price Chart
2.00 1.80 1.60 1.40

1mth 20.0 67.2

3mth 30.9 27.8

12mth 82.3 67.2

2009 475.5 70.0 67.6 49.5 7.5 18.7% 24.6 2.7 1.4% 0.3 7.5 14.7% 14.2% 26.7% 26.5%

2010 518.8 86.3 86.3 61.0 9.3 23.1% 20.2 4.5 2.4% 0.4 9.3 16.6% 16.6% 29.3% 27.8%

2011 568.5 106.1 105.1 75.7 11.5 24.1% 16.3 4.0 2.1% 0.4 11.5 18.7% 18.5% 27.9% 29.3%

2012E 732.9 134.1 131.1 98.3 14.9 29.9% 12.8 6.0 3.1% 0.6 14.9 18.3% 17.9% 25.0% 30.4%

2013E 850.2 159.5 155.9 117.0 17.8 19.0% 10.7 7.0 3.7% 0.6 17.8 18.8% 18.3% 25.0% 32.0%

24.05% 21.20% 17.26% 18.74%

9.12% 23.26% 27.61% 23.10%

9.57% 22.99% 21.76% 24.14%

28.93% 26.36% 24.76% 29.87%

16.01% 18.91% 18.98% 18.98%

1.20
1.00 0.80 0.60

0.40 Jun-11

Aug-11

Oct-11

Dec-11

Feb-12

Apr-12

Jun-12

The Research Team research@bimbsec.com.my 03-26918887 ext 111

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19 July 2012

Re-Initiate Coverage: Padini Holdings

BUSINESS PROFILE
Brief background. Padini Holdings Berhad (Padini) was incorporated in 1971 and started its business in manufacturing & wholesaling before venturing into trading, distribution and retailing. Mr Yong Pang Chaun, whom is the present managing director and also a substantial shareholder with a 44.0% stake, is also the founder of the group. Over the years, the group has developed their retail business for the low to middle income level. Started life as a manufacturer and supplier of garments around the early 70s, the group then made inroads into the retail scene some years later with its diversified flagship brand. To date, Padini has over 41 years under its belt and is still going strong. Company History

1971
1975 - 87 1988 1990 1992 1994 1998 1999 2004 2006 2009 2010
Source : Company

Group started as manufacturer cum wholesaler of women's fashion PADINI, VINCCI & MIKI brands established to distribute men's, women's and children's wear Switch from wholesaler to consignor SEED label established to distribute contemporary fashion First of the Group's single brand retail store opened VINCCI ceased its apparels line; full emphasis on women's fashion shoes; PADINI AUTHENTICS established Listing of Padini Holdings Berhad on the KLSE Second Board First of the Group's multi-brand concept store opened; two more labels, P&Co and PDI added Padini Holdings Berhad moved to the KLSE Main Board First of the Group value stores, Brands Outlet, opened Padini brand was valued by Interbrand at RM245 million An implementation of an ERP solution from SAP, started in August 2008, finally went "live" in June 2010

Well-established fashion labels. Currently Padini owns 9 well-established fashion labels: Vincci, Vincci+, Vincci Accessories, Padini, Padini Authentics, PDI, Seed, Miki and P&Co. Each of their distinct labels represents a particular fashion philosophy that encompasses a comprehensive range of products that fit into their targeted consumers universe.

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19 July 2012 Groups Trading Subsidiary

Re-Initiate Coverage: Padini Holdings

PADINI GROUP

Vincci Ladies Specialties

Padini Corporation

Seed Corporation

Yee Fong Hung

Mikihouse Children's Wear

Source: Company, BIMB Securities

PRINCIPAL ACTIVITIES A regional retail player. Already an established retailer domestically, Padini had embarked on its regional expansion and have embedded their presence in Thailand, Brunei, Saudi Arabia, Philippines, Cambodia, Egypt, Oman, United Arab Emirates, Indonesia, Syria, Pakistan, Qatar, Bahrain and Morocco. For overseas markets, the products are sold mostly through retail stores managed by licensees and dealers. Well-diversified. Today, Padini is a leader in the domestic textile and garment industry with extensive network retailing its labels via freestanding stores, multi-brand Padini Concept Stores (PCS), franchised outlets and consignment counters in Malaysia and overseas. As at 2011, Padini operates 45 single brand stores, 22 multi-brand concept stores and 13 Brands Outlet stores. On top of that, Padini also involves in the distribution and retailing of its own fashion labels through 140 consignment outlets and 14 franchise stores and dealer stores throughout the nation. For markets abroad, the products are sold mostly through retail stores managed by licensees and dealers. The increasing and declining number of stores will have a major impact to the company as their sales growth is generated from new expansion of gross floor area (new retail space). Retail Distribution Network

Retailing

Free Standing Store

Multi Brand Store

Brands Outlet Store

Consignments

Franchise Store

Dealer Store

Source: Company, BIMB Securities

Affordability + Extensive = Brands Outlet. In addition, the Group also utilizes a great number of lesser known house brands to market as value-for-money merchandise in its Brands Outlet (BO) stores. BO is the personification of shopping convenience, variety and affordability. Another feature of BO is that the store layout is designed to make the shopping experience easy and fun and is well-organised to showcase the extensive options within each product category. BO has grown exponentially from 2006 to become a substantial earnings driver, contributing 20% to group revenue in Q1FY12. From the first store opened in Dec 2006 at Ampang Point BO now cover a total gross floor area of 197,335 sq ft.

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19 July 2012 Padini Concept Store Outlet Brands Outlet

Re-Initiate Coverage: Padini Holdings

Source: Padini

Padinis Brands Portfolio Brand Sample Padini Brands Description


Provides chic, formal and smart casual wear for todays young executives. Office attire range includes tailored suits, separates, shirts, slacks and knitwear. Designed with a contemporary feel for modern executives and managers between the mid 20s and late 30s; both genders

Padini Authentics

A casual line for men, women and kids to reflect a relaxed and easy lifestyle; this line includes jeans wear, active wear, nauticals, khakis, knitwear and sweaters, and a range of accessories that is consistent with the labels casual image.

PDI

PDI is casual wear that includes jeans, Tshirts, jackets and accessories. Basic, easy to mix and match garment items with slight fashion elements to enhance the aesthetic appeal of the brand; Designed for the teens to the 30s; both genders

VINCCI

A playground for shoe lovers and addicts. A line of contemporary fashion accessories, including shoes, bags, belts, jewellery, eyewear, and watches. Vincci morphs the hottest inspiration straight off the worlds fashion catwalks into up-to-the minute and stylish accessories. Emphasis on affordability, trendy and a quick-to-market strategy.

VINCCI+

Vincci+ offers stylish shoes, bags and accessories that are high on the lure and fashion factor. Offers higher quality leather, more refined daimente and stones, softer satins, prettier laces or sturdier woods.

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19 July 2012

Re-Initiate Coverage: Padini Holdings

VINNCI Accessories

A spin-off from Vincci, as the purveyor of all things related to accessories such as necklaces, bangles, rings and earrings to belts, sunglasses, shoes, bags and etc.

P&Co

P&Cos motto is fashion unlimited and they live up to it in designs that are ahead of the others on the street. Eclectic, edgy and experimental, P&Co is a label for the individualistic fashionista.

Seed

Focus on contemporary fashion, trendy and creative offering both career and casual dressing for the young and even hip kids! Offer runway-inspired and hottest trends alongside updated work wear pieces that are fashionably tailored for the corporate world.

MIKI Kids and MIKI Maternity


Childrens wear that is bright, fun and colourful, catering for those between 3 to 13; Miki Maternity is designed that carries a range of clothing that is practical yet fashionable for the mums-to-be. i.e: Corporate Mum, Relaxed Mum, and Glamour Mum.

Source: Companys website/BIMB Securities

GROWTH STRATEGY Network expansion plans. Padini has budgeted about 74,000 sq ft of gross floor to expand their market reach by 4QFY12 located in the Paradigm Mall (PJ) and the Setia City Mall(Klang), the latest shopping landmarks for their respective vicinity. i. BO and PCS - Leveraging on its successful core business, Padini is expanding its BO and PCS stores in with 10 new stores for FY12. Out of these, 5 are already operational while the remaining 5 are to be opened in 4QFY12 encompassing 2 PCS and 3 BO. The PCS expansion will cover a gross floor area of approximately 46,000 sq ftand are slated to open by end of FY12 which will be located in the Klang Valley and Ipoh. As for BO, the expansion will be covering a gross floor area of approximately 28,000 sq ft; 2 will be in the Klang Valley and 1 in Kuching, Sarawak. Negotiations - Other than that, Padini also in negotiations stage with Genting to open a BO at the Genting Hotel Complex to be opened in FY13. Another negotiations are also ongoing with FJ Benjamin for them to be the franchisee for their Vincci products in Indonesia. Headquartered in Singapore and listed on the Singapore Exchange since November 1996, FJ Benjamin has offices in nine cities, manages over 20 iconic brands and operates 166 stores. FJ Benjamin exclusively retails and distributes brands such as Banana Republic, Catherine Deane, Cline, Gap, Givenchy, Goyard, Guess, La Senza, RAOUL, and Sheridan across various territories. Its retail footprint includes Southeast Asia, Hong Kong and Australia. It distributes in-house labels RAOUL and Catherine Deane through pointsofsale across Europe, the United States and the Middle East.

ii.

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19 July 2012 Revenue by Distribution Channels


Consignment Own Stores

Re-Initiate Coverage: Padini Holdings

73.7%

73.4%

73.4%

76.4%

77.9%

16.9% FY07

17.7% FY08

15.8% FY09

14.5% FY10

13.7% FY11

Source: Company/BIMB Securities

Revenue Breakdown (FY2005-FY2013E)


900 RMm 800 700 600 500 383.3 400 300 200 100 0 2005 2006 2007 2008 2009 2010 2011 2012E 2013E Source: Company, BIMB Securities 243.3 286.1 316.9 475.5 568.5 518.8 Seed Corporation SB Yee Fong Hung (M) SB Mikihouse Children's Wear SB Others 732.9 850.2 Vincci Ladies Specialties Centre BS Padini Corporation SB

RETAIL SECTOR OUTLOOK Encouraging demography. We are of the view that the future for retail players looks bright especially with the countrys young population. As Padinis main customers are mostly teenagers and young adults, there is tremendous growth potential for Padinis brands. Malaysia Population by Age Group (2000 & 2010) 2000
4.0% Below 15 years old 15 - 64 years old 65 years old and above 27.2%

2010
4% 32%

62.0%

64%

Source: Department of Statistics/BIMB Securities

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19 July 2012

Re-Initiate Coverage: Padini Holdings Malaysias retail industry defined. Distributive Trade Sector comprises of wholesale trade, retail trade and motor vehicles as the three main sub-sectors. Sales value of Distributive Trade sector in 1Q2012 increased to RM204.1bn or 9.2% as compared with 1Q2011. The retail trade sub-sector recorded the highest percentage growth in sales value circa. 10.7% or to RM9.1bn, followed by wholesale trade of 10.2% and motor vehicles with 2.6% as compared to the previous year. Sales Value of Distributive Trade sector (2010 1Q2012)
RM bn 250 200 164.4 150 100 50 0 Q1 Q2 2010 Q3 Q4 Q1 Q2 2011 Q3 Q4 Q1 2012 178.9 Sales value

169.4

173.4

186.9

195.6

204

206.8

204.1

Source: Department of Statistics/BIMB Securities

FINANCIAL HIGHLIGHTS Proven track record. Padinis track record has been impressive with continuous growth since 2005. During the period, the group had posted revenue and net earnings CAGR of 15% and 22% respectively. Going forward, we expect Padini to register net profit of RM98.3m and RM117m for FY12 and FY13 respectively, mainly driven by outlet expansion and positive sector outlook. Resilient Revenue, Pre-tax Profit and Net Profit (FY2005-FY2011)
180 160 140 120 100 80 60 40 20 0 RMm RMm 1000 900 800 700 600 500 400 300 200 100 0

2005

2006

2007

2008

2009

2010
Net Profit

2011

2012E

2013E

Pretax Profit (PBT) Source: Company/BIMB Securities

Revenue

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19 July 2012

Re-Initiate Coverage: Padini Holdings Impressive ROE. Padinis efficiency is second to none as the group managed to maintain its ROE at above 25% since 2006, way above the markets average of 15%-16%. For FY12 and FY13, we expect Padinis ROE to be even more astounding at above 30%.

ROE and ROA Performances


ROE 35% 30% 25% 20% 15% 10% 5% 0% 2005 2006 2007 2008 2009 2010 2011 2012E 2013E Source: Company, BIMB Securities ROA

EBITDA Margin
30% 22.52% 20.83% 20% 14.21% 18.31% 16.32% 16.09% 18.86% 21.63% 22.03%

10% EBITDA Margin 0% 2005 2006 2007 2008 2009 2010 2011 2012E 2013E

Source: Company, BIMB Securities

Dividend Policy. Padini does not have a formal dividend policy. However, the group declared about 35% of net profit as dividend for FY11. The groups dividend has ranged between 1.1sen 4.5sen per share for the past 5 years (FY07-FY11) or translating to a payout ratio from a low of 23% to a high of 49% (FY10). Going forward, we expect the group to surpass the 35% payout for FY11 and have estimated approximately 40% for both FY12 and FY13, resulting to a yield of above 3%.

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19 July 2012 Dividend Payout


140 120 100 80

Re-Initiate Coverage: Padini Holdings

60% 50% 40% 30%

60 40 20 0 2005 2006 2007 Net Income Source: Company, BIMB Securities 2008 2009 Dividend Payout 2010 2011 2012E 2013E 20% 10% 0%

Dividend Payout Ratio

VIEW AND RECOMMENDATION We are re-initiating coverage on Padini Group Berhad with a Target Price (TP) of RM2.13 which is derived by pegging a target 5 years average PER Band of 12x over FY13 EPS of 17.8sen. The impressive upside potential is justifiable given that: i. Network expansion. Padini already a household brand name will continue to strive to expand its reach not only domestically by also in Indonesia as well. Hip and young urban population. Since Padinis customer segments are predominantly teenagers and adults, growth potential is huge. Going forward, we expect consumer spending to be buoyed by this segment with high spending power. Positive retail outlook. The Distributive Trade Sector comprises of wholesale trade, retail trade and motor vehicles as the three main sub-sectors. Sales value of Distributive Trade sector in 1Q2012 increased to RM204.1bn or 9.2% as compared with 1Q2011. The retail trade sub-sector recorded the highest percentage growth in sales value circa. 10.7% or to RM9.1bn, followed by wholesale trade of 10.2% and motor vehicles with 2.6% as compared to the previous year.

ii.

iii.

Table 1: Peer Comparison


Company PADINI HOLDINGS ZHULIAN CORP BHD WING TAI MALAYSIA BHD BONIA CORP BHD VOIR HOLDINGS BHD TEO GUAN LEE CORP BHD HING YIAP GROUP BHD Average Source: Company, BIMB Securities Mkt Cap (RMm) 1,263.19 979.80 618.99 463.62 57.60 60.30 119.10 Price (RM) 1.92 2.13 1.90 2.30 0.48 1.48 2.85 Target Price (TP) 2.13 2.30 n.a. 3.10 n.a. n.a. n.a. EPS (sen) FY11 0.15 0.23 0.29 0.29 n.a. n.a. n.a. 0.24 FY12F 0.16 0.26 0.39 0.33 n.a. n.a. n.a. 0.28 P/E (X) FY11 13.15 9.26 6.55 8.07 n.a. n.a. n.a. 9.26 FY12F 11.48 8.19 4.87 7.08 n.a. n.a. n.a. 8.00 ROE 29.28 25.61 12.54 17.97 9.23 14.23 14.21 Div Yield 3.12 5.63 2.63 2.17 2.63 10.00 1.75

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19 July 2012 Historical PE Chart


2.50

Re-Initiate Coverage: Padini Holdings

2.00

13x 10x 9x

1.50

1.00

6x 4x

0.50

0.00 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Feb-08 Feb-09 Feb-10 Feb-11 May-08 May-09 May-10 May-11 Feb-12 May-12 500.0% 400.0% 300.0% 200.0% 1.00 100.0% 0.50 0.0% -100.0% 16-Jun-04 16-Jun-05 16-Jun-06 16-Jun-07 16-Jun-08 16-Jun-09 16-Jun-10 16-Jun-11 16-Jun-12 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11

Relative Performance (2004-2011)


2.50

2.00

Padini
1.50

Relative Performance

0.00

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19 July 2012

Re-Initiate Coverage: Padini Holdings

Earnings Estimates
FYE 30 June (RMm) Revenue Pretax profit Core Net profit Core EPS (sen) EPS growth (%) DPS (sen) NTA/ share (RM) Net gearing (x) PER (x) P/NTA (x) Net div. yield (%) ROE (%) Interest Cover (x) 2010 518.8 86.3 62.1 9.3 23.1% 4.5 0.4 net cash 20.2 5.4 2.4% 27.8% (80.1) 2011 568.5 105.1 77.3 11.5 24.1% 4.0 0.4 net cash 16.3 4.4 2.1% 29.3% (216.6) 2012E 732.9 131.1 98.3 14.9 29.9% 6.0 0.6 (0.4) 12.8 3.4 3.1% 30.4% 44.0 2013E 850.2 155.9 117.0 17.8 19.0% 7.0 0.6 (0.7) 10.7 3.4 3.7% 32.0% 45.1 2014E 974.4 180.0 135.0 20.5 15.4% 8.0 0.6 (0.9) 9.3 3.4 4.2% 37.0% 45.5

Balance Sheet
FYE 30 June (RMm) Non Current Assets Current Assets Total Assets Current Liabilities Non Current Shareholders' Fund Liabilities Minority Interests Equity & Liabilities 2008 74.4 189.9 264.3 91.6 3.2 169.5 0.0 264.3 2009 81.2 209.5 290.7 83.3 3.4 204.0 0.0 290.7 2010 92.3 264.3 356.6 111.3 10.9 234.3 0.0 356.6 2011 94.6 349.8 444.3 137.9 23.7 282.7 0.0 444.3 2012E 313.6 97.0 410.6 44.0 1.6 365.0 0.0 410.6

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19 July 2012
DEFINITION OF RATINGS BIMB Securities uses the following rating system:

Re-Initiate Coverage: Padini Holdings

STOCK RECOMMENDATION BUY Total return (price appreciation plus dividend yield) is expected to exceed 10% in the next 12 months. TRADING BUY Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain. NEUTRAL Share price may fall within the range of +/- 10% over the next 12 months TAKE PROFIT Target price has been attained. Fundamentals remain intact. Look to accumulate at lower levels. TRADING SELL Share price may fall by more than 15% in the next 3 months. SELL Share price may fall by more than 10% over the next 12 months. NOT RATED Stock is not within regular research coverage. SECTOR RECOMMENDATION OVERWEIGHT The Industry as defined by the analysts coverage universe, is expected to outperform the relevant primary market index over the next 12 months NEUTRAL The Industry as defined by the analysts coverage universe, is expected to perform in line with the relevant primary market index over the next 12 months UNDERWEIGHT The Industry as defined by the analysts coverage universe, is expected to underperform the relevant primary market index over the next 12 months Applicability of ratings The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings as we do not actively follow developments in these companies. Disclaimer The investments discussed or recommended in this report not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of BIMB securities Sdn Bhd may from time to time have a position in or either the securities mentioned herein. Members of the BIMB Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgements as of this and are subject to change without notice. BIMB Securities Sdn Bhd accepts no liability for any direct, indirect or consequential loss arising from use of this report.

Published by

BIMB SECURITIES SDN BHD (290163-X) A Participating Organisation of Bursa Malaysia Securities Berhad Level 32, Menara Multi Purpose, Capital Square, No. 8 Jalan Munshi Abdullah, 50100 Kuala Lumpur Tel: 03-2691 8887, Fax: 03-2691 1262 http://www.bimbsec.com.my

Kenny Yee Head of Research

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