- We are upgrading Padini Holdings to BUY from HOLD with a revised fair value of RM1.70/share, pegged to a PE multiple of 13x FY15F earnings, following a company visit.

- Padini’s share price has fallen significantly by 40% in the past six months on the back of:- (1) softening consumer sentiment; and (2) margin compression arising from aggressive promotional activities to clear inventories prior to the implementation of GST.

- Nevertheless, our upgrade is premised on:-

1) Padini’s resilient business model, which is well positioned to capitalise on the upturn in the economy given its sizeable distribution network and continuous brand building phase, despite near-term setbacks arising from a weaker consumer spend;

2) Slower SSSG contraction in relative to its peers’ given its established brand equity and affordable price structure; products are priced for the mass market. We therefore expect SSSG to remain flat in FY15F. While we acknowledge a competitive retail landscape, SSSG for 1QFY15 remains healthy – Concept Store (+2.7%) and Brands Outlet (+7.9%);

3) While Padini may report a weaker set of numbers than consensus’ expectation, its generous dividend policy (attractive dividend yield of 7%) provides support to share price. Management reaffirmed its commitment to pay 2.5sen dividend each quarter (equivalent to 10sen p.a.); and

4) Undemanding FY15F valuations of 11x PE at the current level, which is below 3-year historical mean of 13x, and sufficiently reflecting the EPS deceleration.

- The strategic shift to focus on Brands Outlet has mitigated the muted performances of its other brands (i.e. Vincci and Miki) – nearly half of earnings growth now comes from Brands Outlet, which will underpin earnings growth moving forward.

- We caution that earnings could hit a soft patch in 4QFY15F as we expect sales to slow down before picking up in 1Q/2QFY16F amidst uncertainties in the GST rollout. Cognisant of this, management will continue its bundle promotions to support sales volume ahead.

- We have thus trimmed FY15F-FY17F earnings by 6%-13% to account for a slight margin compression. FY15F earnings are projected at RM85mil.

- Store expansion would nonetheless continue – five new stores are earmarked to open by end-FY15F. Strong balance sheet with net cash of RM84mil as at end-1QFY15 is supportive of store expansion plans.

Source: AmeSecurities