Padini Holdings Bhd
(April 14, RM2.15)
Maintain buy with a lower target price (TP) of RM3.70: We like Padini Holdings Bhd for its solid balance sheet, consistent dividend payments and strong earnings recovery after the Covid-19 outbreak. We do not believe Covid-19 would structurally change Padini’s fundamentals and have any long-term earnings implications. Therefore, we recommend a “buy” on a price weakness.
We estimate Padini’s monthly cash burn rate at RM21 million with basic salaries of staff and lease and financing expenses being major fixed components. Take note negotiations for rental waivers or rebates are in progress with landlords. Successful negotiations mean immediate cost savings for the company.
Padini’s cash balance was RM586 million as at the second quarter ended Dec 31, 2019 (2QFY20), equivalent to 28 months of Padini’s fixed expenses. If without any rental rebates, Padini still has sufficient cash to keep business afloat for at least two years without sacrificing dividends for shareholders.
Padini has been constantly paying dividends even during recessions in 2008 and 2009. While some may argue that historical dividends are not a good representative of future dividends, we reckoned in Padini’s context, the historical record is relevant and can serve as a good guidance. This is on the group’s cash hoard of RM586 million to sustain yearly dividend payments of RM76 million and Covid-19 not negatively impacting Padini’s business landscape for the long-term.
When the movement control order (MCO) is lifted, we believe sales of clothing and shoes would start to recover and grow further when Covid-19 is contained. In addition, the government has introduced a hefty stimulus programme with widespread cash distributions to the bottom 40% and middle 40% income groups, spurring consumer spending when Covid-19 subsides.
A recent update from the group revealed the supply chain disruption is no longer a relevant concern. We suppose the resumption of workers in China’s manufacturing plant has resolved the situation, allowing Padini to replenish sufficient stocks before Malaysia’s MCO. Upon Padini resuming operations, we believe the group will introduce more stock-keeping units underpinned by its efficient procurement and dynamic efforts in designing.
Our earnings estimates for Padini for the financial year ending June 30, 2020 (FY20), FY21 and FY22 are cut 33%, 11% and 8% as our FY20, FY21 and FY22 revenue projections are reduced 13%, 5% and 5% to account for a second MCO extension until April 28, 2020 and a projected U-shape recovery in sales after the MCO.
Our “buy” recommendation on Padini is reiterated with a lower TP of RM3.70 based on a price-earnings valuation of 15 times 2021 earnings per share. Our “buy” recommendation is premised on its solid balance sheet, consistent dividend payments and a strong earnings recovery upon Covid-19 being contained. — TA Securities, April 14
http://www.theedgemarkets.com/article/strong-profit-recovery-seen-padini-when-covid19-contained
