By Xavier Kong
AllianceDBS Research upgrades its recommendation of Padini Holdings Bhd to a “buy” from a previous “hold” call, also raising its target price for the group to RM1.50 from a previous RM1.43 as well.
The research house based the upgrade on the group’s attractive dividend yield, strong balance sheet, and recovery prospects moving forward.
The research house noted that the group is currently trading near its one-year low with its profit margin nearing bottom, but that the group also has a strong balance sheet, with a dividend yield of more than 7%.
“We believe the negatives have been priced in, and the stock deserves a second look for investors positioning to capitalise on the recovery in consumer spending in Malaysia,” said AllianceDBS.
Also noted was that AllianceDBS expects the group’s results for the fourth quarter of its 2015 financial year (FY15), which looks to be announced on Aug 18, to come in at only RM4 million in net profit for the quarter, which is “significantly below the consensus forecast of RM16 million”.
However, the drop in profits is due to the group absorbing the 6% goods and services tax (GST), which had also reduced the group’s FY16 gross profit margin to 39%. The research house noted that the group will be passing on some of the GST, and margins should recover moving forward.
AllianceDBS also noted that the group is planning to open 12 outlets in its FY16, which could in turn drive earnings growth even if margins fail to recover, as the group would then be penetrating new markets in suburban cities, which AllianceDBS described as a “huge untapped market”.
“We are also positive that its value for money brand – Brands Outlet – could benefit from down-trading,” added the research house, noting that consumers are increasingly looking for value propositions in the competitive apparel market.
Its management has also committed to paying out a minimum dividend per share of 10 sen, which is a yield of more than 7%.
“Given its strong cash generation capability and net cash position of RM164 million, we are comfortable that such a payout is sustainable over the next few years even if its earnings growth remains sluggish,” said AllianceDBS, adding that the strong net cash position should also allow the group to undertake its outlet expansion plan without stretching its balance sheet.
As at the noon close, Padini’s shares were last traded at RM1.38, up 2 sen.
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