PP10551/07/2012 (030567)

14 Mar 2012

MALAYSIA EQUITY
Investment Research
Daily
Company Update
The Research Team
+60 (3) 9207 7688
research2@my.oskgroup.com Padini Holdings
Rising to The Occasion
We recently had a follow-up visit to Padini, which is one of our Top Buys for 2012.
We continue to like the stock’s resilient performance amid an increasingly
BUY  turbulent operating environment. Despite the volatility in cotton prices and
Fair Value RM1.80 intense competition in the retail space, we remain confident that the company’s
Previous RM1.80 high inventory and wider retail network relative to its peers will hold it in good
Price RM1.45 stead. Maintain BUY, with a FV of RM1.80, based on 14x FY12 EPS.

CONSUMER /RETAIL Gaining prominence. After providing 3 Good reasons (Good track record, Good growth
Padini is involved in the retailing of apparel, story and Good pricing) why investors should like Padini in our previous report, the
footwear and accessories.
share price has rallied by a strong 13.3% to RM1.45 in just one month. Although the
volatility in cotton prices and entry of new competitors might affect garment retailers in
general, we continue to believe that Padini will stand strong amid the tough environment
Stock Statistics given its high inventory level and wide network of outlets versus its peers.
Bloomberg Ticker PAD MK
Share Capital (m) 657.9
Market Cap 954.0 Unfazed by the challenges ahead. From a macro perspective, India‟s cotton export
52 week H | L Price 1.59 0.82 ban will definitely affect textile and garment retailers but we believe Padini will be able to
3mth Avg Vol (000) 1,826.2 weather the storm in view of its high level of inventory and cash pile. The entry of big
YTD Returns 33.0
Beta (x) 1.23 overseas retailers such as Top Shop, Zara, MNG, Cotton On and Uniqlo in recent years
has certainly raised the bar for local garment retailers. Another fashion retailer, Hennes
Shariah Compliant YES & Mauritz‟s (H&M), will also open its first store in Malaysia this year. We think that
Padini‟s strong retail network and wide customer base will continue to support its
Major Shareholders (%)
growth, although the competition is becoming tougher.
Yong Pang Chaun 44.0
5.0
Skim Amanah Saham
Spreading its wings overseas. FJ Benjamin Holdings, an industry leader in brand
Bumiputera
building and management, and the development of retail and distribution networks, has
approached Padini with the view to franchising the “Vincci” brand (under the brand
Share Performance (%) name of „VNC‟) in Indonesia. The VNC franchise stores in Indonesia have been
Month Absolute Relative languishing due to pricing problems relating to a luxury tax on its products. The
1m 20.6 10.6
discussions are still at the early stage but if the deal goes through, it would see Padini
3m 47.7 28.2
6m 74.0 46.7 making a significant breakthrough in expanding overseas. Similarly, the group is also in
12m 51.8 28.4 the midst of revamping its franchisee model in Thailand.
6-month Share Price Performance
Maintain BUY. Going forward, the group aims to introduce apparel based on overseas
1.80
styles and fashion at a faster pace to Malaysians by ramping up its efficiency and come
1.60

1.40 up with new garments in 3 to 4 weeks. Maintain BUY, with the stock‟s fair value
1.20 unchanged at RM1.80.
1.00

0.80

0.60

0.40

0.20

0.00 FYE June (RMm) FY09 FY10 FY11 FY12f FY13f

Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Jan-12 Feb-12
Revenue 475.5 518.8 568.5 668.7 738.9
Net Profit 49.5 61.0 75.7 86.2 97.1
% chg y-o-y 18.7 23.1 24.2 13.9 12.7
Consensus - - - 81.6 90.6
EPS (sen) 7.3 9.0 11.2 12.8 14.4
DPS (sen) 2.7 3.0 4.0 6.1 5.7
Dividend yield (%) 1.9 2.1 2.8 2.8 3.2
ROE (%) 24.3 26.0 26.8 26.3 25.2
ROA (%) 17.1 17.1 17.0 17.6 17.6
PER (x) 19.8 16.1 12.9 11.4 10.1
BV/share 0.30 0.35 0.42 0.48 0.57
P/BV (x) 4.8 4.2 3.5 3.0 2.5
EV/EBITDA (x) 10.7 8.1 6.9 5.9 4.7

OSK Research | See important disclosures at the end of this report 1

OSK Research

The Challenges Ahead

1) Cotton Export Ban

Oops, India does it again. India, the world‟s second largest cotton exporter with a global market share of
about 20%, banned its cotton exports on 5 March 2012. It last suspended cotton shipments on 21 April 2010,
and that lasted until 31 Oct. The international Cotton Association (ICA) stated that this will have serious
ramifications on world cotton trade. On 12 March, India partially ended the one-week ban on exports after
protests from growers, traders and China, its biggest customer. The exports registered before the ban will be
revalidated within 10 days but no new registrations will be allowed until further notice. The ban will result in
supply shortages that will directly hit the global garment industry, especially with China‟s textile industry being
the largest buyer of India‟s cotton.

Padini’s high inventory will save the day. Padini will be impacted by the cotton ban to a certain degree, but
the group has cautiously stocked up on inventory over the past two years. Management stocked up as it was
concerned over the volatility of cotton prices and as a result, Padini now has a higher inventory compared to
its peers. Such foresight has allowed the company to mitigate the risks arising from India‟s cotton export ban.
In the worst case of a prolonged supply shortage, cash-rich companies like Padini will have no problem
securing products as they can pay up-front. While the company will not be completely shielded from rising
cotton prices, its margins and market share should at least hold up better against most of its peers. The group
will normally keep five months of inventory, and such high inventory levels will likely normalize in the future.

Figure 1: Padini’s inventory level Figure 2: Inventory levels of peers

RM'm RM'm
250
180

200 160
140
150 120
100
100 80
60
50
40
20
-
0
1QCY10 2QCY10 3QCY10 4QCY10 1QCY11 2QCY11 3QCY11 4QCY11
Padini Cheetah Bonia Voir

*As of FY11
Source : Annual Report Source : Annual Report, Bloomberg

2) More Competitors

H&M is coming to town. Swedish fashion retailer, Hennes & Mauritz‟s (H&M), will open its long-awaited
maiden store in Malaysia at Lot 10 in Bukit Bintang this year. This will be followed by Abercrombie & Fitch‟s (a
US casual wear retailer) entry into Malaysia. Over the years, the influx of foreign retail brands, namely Top
Shop, Zara and MNG and more recently Cotton On and Uniqlo, into the local retail market has spiced up the
shopping scene in Malaysia.

Padini has wider coverage, clientele. With rising competition from both local and also foreign established
brands, Padini expects to defend its dominant position with its extensive network throughout Malaysia. Most
of the foreign fashion players‟ outlets are concentrated in the Klang Valley and the number of stores opened
is somewhat limited. Home-grown brands like Padini have a broader network of outlets not only in the Klang
Valley, but also in the relatively untapped cities such as Kuching and Kota Bharu. The group is opening three
Brands Outlets and three multi-brand concept stores in 2HFY12, increasing its retail floor space by

OSK Research | See important disclosures at the end of this report 2

OSK Research

approximately 66,000 sq ft. The Brands Outlet, catering to the mid-range to lower-end shoppers currently not
served by the other brands, will also attract value-oriented customers in the future. Thanks to its wide network
coverage and clientele, we believe the group will reign in an increasingly competitive landscape.

Figure 3: Fashion retailers’ outlets in Malaysia

Brands Outlets in Malaysia Origin

Cotton On 5 Australia

MNG 16 Spain

Padini 235 Malaysia

Topshop 8 UK

Uniqlo 3 Japan

Zara 6 Spain

*As of FY11 figures

Source: Company website

OSK Research | See important disclosures at the end of this report 3

OSK Research
EARNINGS FORECAST

FYE June (RM m) FY09 FY10 FY11 FY12f FY13f

Turnover 475.5 518.8 568.5 668.7 738.9
EBITDA 88.8 109.2 128.5 147.1 166.3
PBT 67.6 86.3 105.1 118.1 133.1
Net Profit 49.5 61.0 75.7 86.2 97.1
EPS (sen) 7.3 9.0 11.2 12.8 14.4
DPS (sen) 2.7 3.0 4.0 6.1 5.7

Margin
EBITDA (%) 18.7 21.0 22.6 22.0 22.5
PBT (%) 14.2 16.6 18.5 17.7 18.0
Net Profit (%) 10.4 11.8 13.3 12.9 13.1

ROE (%) 24.3 26.0 26.8 26.3 25.2

ROA (%) 17.1 17.1 17.0 17.6 17.6

Balance Sheet
Fixed Assets 75.9 80.8 83.6 95.3 92.2
Current Assets 208.2 264.3 349.8 381.7 447.9
Total Assets 289.4 356.6 444.4 490.1 553.1
Current Liabilities 81.8 111.4 138.0 135.3 145.8
Net Current Assets 126.4 153.0 211.8 246.4 302.1
LT Liabilities 3.5 10.9 23.7 16.6 11.6
Shareholders Funds 204.0 234.3 282.7 327.5 385.8
Net Gearing (%) Net cash Net cash Net cash Net cash Net cash

OSK Research | See important disclosures at the end of this report 4

OSK Research

OSK Research Guide to Investment Ratings

Buy: Share price may exceed 10% over 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. Look to accumulate at lower levels
Sell: Share price may fall by more than 10% over the next 12 months
Not Rated (NR): Stock is not within regular research coverage

All research is based on material compiled from data considered to be reliable at the time of writing. However, information and opinions expressed will be
subject to change at short notice, and no part of this report is to be construed as an offer or solicitation of an offer to transact any securities or financial
instruments whether referred to herein or otherwise. We do not accept any liability directly or indirectly that may arise from investment decision-making
based on this report. The company, its directors, officers, employees and/or connected persons may periodically hold an interest and/or underwriting
commitments in the securities mentioned.

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