Kenanga upgrades Padini on 2H recovery prospects

KUALA LUMPUR: Kenanga Investment Bank Research upgraded Padini Holdings Bhd to "outperform" as it expects the fashion retailer to see a gradual recovery in the second half of the year with support from sales during the festive periods.

The research house said it believes Padini's gross profit margin will be able to recover to a comfortable level of 38% from 31% in the recently concluded quarter with a better promotion strategy and lower inventory loss with the full quarter sales.

It added that some of the MCO rental rebates will be recognised starting July 2020 after reaching better agreement with landlords. An estimated half of the rebates were recognised in June.

However, Padini also plans to close a few stores that have reached the end of their tenancy agreements and are currently under monthly renewals, said Kenanga.

Padini's strategies include adopting a resilient business model and focusing on the value-for-money segment through its Brands Outlet stores.

It will not open more than 10 outlets in the local market to streamline cost allocation towards strategic locations and will expand regionally through own-managed stores to strategically control stores' value, which include Cambodia and Thailand.

The research house revised Padini's target price higher to RM2.90 from RM2.15 previously.

"With a two-year CAGR of 37%, we believe that Padini should be traded at a higher valuation level of 16x at plus-one standard deviation of five-year mean forward price-earnings," it said.

During a results briefing, Padini said 4QFY20 results indicated a gradual recovery in footfall post-movement control order with still tepid demand from the tourist-concentrated city stores such as KLCC and Fahrenhheit 88.

However, this was offset by positive recovery from suburban malls such as in Shah Alam, Penang and Johor.

"Nonetheless, the recovery of footfalls is still below the same period last year due to social distancing regulation which limits the number of customers into the stores at a given time, resulting long queues, concurrently limiting its SSSG recovery," said Kenanga.

For the quarter, gross profit margin contracted due to aggressive price discounts after the MCO was lifted, as well as higher inventory written down during the MCO.
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