• Padini faces risk of lower profits as it is absorbing the entire GST while maintaining product prices.
• We lower FY15-17 EPS by 4-15% on weaker margins from GST impact and additional promotional activities.
• Downgrade to HOLD (from BUY) with a lower MYR1.35 TP (- 45sen) in view of the challenging retail market.

What’s New

Padini has decided to absorb the 6% GST from 1 Apr (estimated 5- 6% revenue impact) and maintain price tags of all existing products, as the cost to facilitate GST input tax claims across all outlets could be significant (i.e. stock-take, audit). Meanwhile, Padini could be scaling down its expansion plans as only four new outlets are confirmed for opening in 2015 at this juncture.

Separately, Padini is planning to launch its own online shopping website (e-store) soon but we do not expect any significant earnings impact in the near term given it is at a start-up stage.

What’s Our View

We reduce FY15/16/17 EPS forecasts by 15/7/4% after factoring in lower margin assumptions mainly from the GST impact and steeper discounts on selected products, especially in 3QFY6/15, to reduce its pre-GST inventory. Hence, we lower our TP to MYR1.35 (-45sen) pegged to lower 10x FY16 PER (at 10-year PER mean) from 12.5x FY16 PER (at +1SD of 10-year PER mean).

We downgrade Padini to HOLD in view of the challenging retail market with further risks to Padini’s profit margin in the near term. Share price downside, however, could be limited by its 7.2% net yield backed by healthy net cash (end-2QFY15: MYR0.18/share). Padini currently offers a total return of 5%.

Source: Maybank Research - 19 May 2015