Insider Asia’s Stock Of The Day: Padini Holdings

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Padini Holdings Bhd
Padini Holdings is one of the largest home-grown fashion apparel companies in Malaysia. Its stable of household brand names includes Padini and Vincci. As end-June 2014, it has 281 stores/consignment counters domestically, including 29 Padini Concept Store (PCS) and 27 Brands Outlet (BO). It also has 85 franchise/dealer stores overseas but the domestic operations accounts for the bulk of sales, 94% in FY June 2014.

The domestic retail scene is very competitive, especially after the entry of established and large foreign brands such as H&M and Uniqlo. As part of its counter-measure, Padini diversified into the value-for-money market segment with the BO stores, which sells cheaper, lesser-known house brands. It is also opening stores in smaller towns, where it previously has no presence.

This strategy appears to be paying dividends. From FY2008 to FY2014, sales and pre-tax profit from BO stores grew at an annual compounded rate of 47.7% and 100.9% to RM253.3 million and RM44.0 million, respectively. In the latest FY2014, BO actually registered higher pre-tax margin of 17.4% compared to the company’s blended margin of 14.5%.

Going forward, Padini’s sales are likely driven, primarily, by new store openings. It plans to open 6 BO and 6 PCS stores in FY2015. Profit margins are likely to be depressed in FY2015 due to higher operating expenses, weaker consumer spending, intense competition and GST implementation on April 1, 2015. However, Padini believes that it would be able to ride through this difficult period due to its strategies on merchandising, pricing and network expansion.

Balance sheet is solid with net cash of RM119.0 million at end-FY2014. ROE averaged 27.0% for the last four years with zero net gearing. It raised dividends to 11.5 sen per share in FY2014, translating into a higher-than-market average net yield of 6.5%. The stock is trading at historical P/E of 12.8 times.

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This article first appeared in The Edge Financial Daily, on November 28, 2014.