THE extension of the recovery movement control order (RMCO) may cap the rate of recovery of Padini Holdings Bhd due to the continued limitations on store capacity, says MIDF Research.
“As the RMCO is extended until the end of the year, we expect store capacity to remain limited, which may cap the rate of recovery. Topping that, online and digital platform sales has not grown to a significant level to offset the lower capacity at stores,” said MIDF analyst Ng Bei Shan.
This follows Padini sharing that its sales in July had improved due to the Hari Raya Haji celebration, but with sales in August weakening month-on-month (mom).
The analyst noted that another limiting factor is that sales from tourists make up 30% to 50% in outlet revenue for stores located in tourist hot spots.
“As such, we expect revenue in 1HFY21 to improve from a low base in 4QFY20, but to also be softer than the comparable period one year ago,” said Ng.
Still, the analyst also believes the worst is over for Padini, especially since the group is likely to gain market share due to the pandemic forcing weaker competitors to close down their businesses.
“On top of that, consumers may trade down to value for money brands like Padini from the more expensive brands for similar styles if they remain cautious with spending,” said Ng.
Another bright side is that Padini’s gross profit margin is expected to remain around 30%, which bodes well for profitability, according to the analyst.
“This is due to suppliers offering competitive pricing for stock based on cash terms, which will translate into good gross profit margins for Padini.”
“On the other hand, operating expenses should revert to previous levels as rental expenses are expected to normalise going forward, compared to the discounts given in 4QFY20. That said, rental rates should remain favourable in a tenant’s market,” said Ng.
Still, the analyst noted that the fashion and fashion accessories segment is expected to be one of the most negatively affected sub-segment for retail sales, according to data compiled by the Retail Group Malaysia.
“That means the overall absolute spending on the fashion and fashion accessories sub-segment may still be lower compared to last year,” said Ng.
The analyst also noted that Padini may also hold back from paying dividends until further clarity is seen, depending on the momentum of recovery and whether there may be a spike in cases, which may affect operations again.
“This is to preserve cash flow while the management takes a wait and see stance until the outlook stabilises.”
“We maintain our 8 sen dividend payout for now, and expect that to be paid at once instead of in staggered payments when the business outlook is clearer,” said Ng.
MIDF maintains a neutral call, along with a target price of RM2.09.
At the end of the morning’s trading, Padini’s shares were last done at RM2.31, down a sen, with 425,700 shares traded. – Sep 3, 2020
