Posted by Fitri > 2014-01-21 14:19 | Report Abuse

soon Padini will target pasar malams, as they cannot compete with uniqlo and H&M

Posted by wattapi > 2014-01-21 14:24 | Report Abuse

he dun know uniqlo,h&m

Posted by SJaladdin > 2014-01-21 14:48 | Report Abuse

PADINI hhaa.. wont be in my portfolio

Posted by keanpoh > 2014-01-23 10:35 | Report Abuse

Hi KC, I believe other reason that have contributed to Padini's stock price lacklustre which is not reflected on the financial reports is the opening of international brand outlets in Malaysia such as H&M and Uniqlo. I've been paying attention to traffic in Padini stores in the Klang Valley area myself in the past 1 year and have realised that the traffic has indeed reduced significantly, which is worrying to investors as well as potential investors (like myself).

I believe with the reason given above, the intrinsic value will be lower if you apply 8% growth rate for the next 5 years and 3% growth indefinitely (assumed Padini growth at the rate of the inflation rate in Malaysia). If you have time to make this small change to your excel sheet, do share with us what would the revised intrinsic value be. :)

Posted by kcchongnz > 2014-01-23 10:56 | Report Abuse

Yeah, it is true that i don't know about this uniqlo and H&M competition. Thanks for pointing out from everyone here. i was just basing on what I could get from its financial report. The drop in net profit last year was due to the opening of some new stores. And its latest quarterly report does show that growth in revenue and net profit have resumed for Padini.

So I based on the above and made my conclusions. I still stick to my conclusion, yeah, just based on what I can see from the published reports. The management of Padini has shown that they are a bunch of very resilient people.

If you (keanpoh) want the number based on your assumptions of 8% and 3% growth for the next 5 year and thereafter respectively,my figure is RM2.02 for its intrinsic value.

Posted by wayneteo > 2014-01-23 11:01 | Report Abuse

Kcchongnz, thanks for providing the valuation of Padini, appreciate that very much. This is quite true that the traffic reduced significantly for Padini since the opening of Uniqlo and H&M. I can see that happening in Penang as well but still thank you very much :)

Posted by Avocado_C > 2014-01-23 11:12 | Report Abuse

KC, thanks for the write-up again. Padini is on my watchlist for 2014 too, but I am still observing its performance. Yes, Padini has been delivering consistent growth in the past, but I doubt whether this kind of growth rate, i.e. 10% - 16% can be maintained for the next 5 years.

At first, I was quite positive on Padini as I think they are serving the mass-market and 2nd tier cities pretty well. However, when I started seeing Uniqlo opening in Melaka, Cheras, Alamanda, the Mines ... I am getting a little worried (because I thought Uniqlo will not compete in those cities).

As a shopper, I have to honestly admit that Uniqlo clothings are surprisingly value for money. The designs are pretty simple & basic, but the quality / material is really good. On the other hand, I have not bought any Padini clothes or Vincci shoes for the past few years. Uniqlo's main selling points are its clothing technology and their marketing tactics (e.g. "limited editions" designs).

The edge that Padini currently holds over those foreign brands, in my opinion, include 1) its long presence in the country (brand awareness); 2) price; 3) design for our climate (noticed that foreign brands including Uniqlo are selling winter clothings in Malaysia during year-end, which I observed is slow moving and inefficient use of store space for at least 3 months). I hope Padini can capitalise on its strength and innovate to grow further. If it doesn't change, it will be falling into the likes of Esprit, Giordano, Bossini, etc ... which were once market leaders in clothes retailing, but all struggling now.

Posted by haikeyila > 2014-01-23 11:24 | Report Abuse

im not sure if selling winter clothes is a bad idea. if you're looking to travel at the end of the year its very, very difficult to find good, cheap winter clothes - but now we have uniqlo. with more bolehlanders travelling (to nz for example) with AyerAsia it could actually be a smart move.

Posted by keanpoh > 2014-01-23 11:46 | Report Abuse

Thanks KC for doing the recalculation for 8% growth for the next 5 years & 3% growth indefinitely.

Looks like the current market price is still a good bargain even with lower intrinsic value of RM2.02 based on a lower growth rate.

So people, are you buying into Padini?

Posted by kcchongnz > 2014-01-23 12:23 | Report Abuse

不在此地不知其樂也

Posted by midas_max > 2014-01-23 12:40 | Report Abuse

在此地,知其樂也~

Posted by calvintaneng > 2014-01-23 21:00 |

Post removed.Why?

Posted by keanpoh > 2014-01-24 11:17 | Report Abuse

Hi calvintaneng,

I do agree with you on the basic necessities. But do remember that food and clothing are in monopolistic market, which means barrier to entry is low. Competitors can enter the market easily to share the profit in the market. Therefore, the pricing power of businesses operating in these industries are low and sometimes they have to offer sales to boost their sales but sacrifices on the profit margins.

Yes, clothing is a necessity. But if Padini is not doing well, people can easily buy from its competitors. All these said, it really depends on how Padini managed to differentiate itself from its competitors and thrive in the industry. That's how I look at this industry (as well as the food industry).

Posted by cct > 2014-01-24 11:26 | Report Abuse

此地不樂也^^^

Posted by Joonism > 2014-01-30 00:59 | Report Abuse

hi kcchongnz,

thankss for your interesting analysis article. Btw would you mind show the exact way of calculating the intrinsic value based on the theory of investment value (formulation) that have been stated? Much appreciated!

Posted by kcchongnz > 2014-01-30 10:14 | Report Abuse

Posted by Joonism > Jan 30, 2014 12:59 AM | Report Abuse
hi kcchongnz,
thankss for your interesting analysis article. Btw would you mind show the exact way of calculating the intrinsic value based on the theory of investment value (formulation) that have been stated? Much appreciated!

Financial theory postulated by John Burr Williams in his “The theory of investment value” says that the value of a stock is worth all of the future cash flows expected to be generated by the firm, discounted by an appropriate risk-adjusted rate.

The theory and the mathematics of it are actually not that difficult. Let us apply it for Padini with its free cash flow (FCF) of the firm of RM68777 thousands last financial year ended 30 June 2013. Let’s assume this FCF will grow at g=12% for the next 5 years and 3% forever after that. Finally we use R=10% discount rate or the cost of capital for the firm. The table below shows the growth and its FCF each year (CFn) and the present value of free cash flow (PV FCF):

Year, n 0 1 2 3 4 5
FCF each year, CFn xxx 77030 86274 96627 108222 121209
PV FCF=CFn/(1+R)^n xxx 70027 71301 72597 73917 75261

The sum of the PV FCF is added up and equals to RM363103 thousands. This is the PV of FCF for the first 5 years. The subsequent FCF, or terminal FCF is given by the formula:

Terminal FCF, $=CFn(1+g)/(R-g)=121209*(1+3%)/(10%-3%)=1783498

The discounted terminal FCF = 1783498/(1+10%)^5=1107412

Hence total PV FCF of firm=363103+1107412=1470515

There is an excess cash of 206226 which is presumably not required for the ordinary operations and we have to add to the PV FCF. Furthermore, this PV FCF does not belong to the common shareholders alone. It is shared with the debt holders and minority interest, if any. Assuming the market value of the debts is same as the book value (which need not necessary true), the PV FCF attributed to common shareholders is,

1470515-35964+206226=1460777

Divide this value by the number of share of 657910, the PV FCF, or intrinsic value of Padini is RM2.49 per share. At the present price of RM1.60, the margin of safety is 36%.

Theory and mathematics of valuation is straight forward. However, the judgments on the future cash flows and the discount rate are the more important parameters.

Posted by Elwin Kai Kai > 2014-01-30 11:18 | Report Abuse

kc thanks for ur analysis is very clear and straight forward is just im a bit confuse of the symbol..sry still new to investing

Posted by Joonism > 2014-01-30 11:57 | Report Abuse

Thx alot for such detail explaination! I understand now..Just wonder if there are any other instrictic value calculation other than this projected free cash flow based formula? Btw how does we justify R and g usually? Any factors that influence the variables?

Posted by Horsefield > 2014-01-31 12:17 | Report Abuse

Joonism, you can refer to the links posted by Tan KW before. It explains your doubt above.

http://klse.i3investor.com/blogs/kianweiaritcles/44139.jsp
http://klse.i3investor.com/blogs/edu_morg_star/31605.jsp
http://klse.i3investor.com/blogs/edu_morg_star/31670.jsp

Below is excel template readily in Internet. Please do some modification for the said debt & minority interest adjustment.
http://www.focusinvestor.com/DiscountedCashFlows.xls

Happy CNY..

Posted by Joonism > 2014-01-31 18:03 | Report Abuse

thx alot Horsefield!happy CNY!

Posted by tiffanie > 2014-02-02 16:49 | Report Abuse

Dear all, I am a newbie here and in the stock market as well, would really like learn from you all about the stock investment.

I am targeting for Padini as well. Apart from its good past years performance and sticker price calculation, I am also her loyal and regular shopper. I agree that since the entry of H&M and Uniqlo to Malaysia, they attracted a lot of youngsters and fashion lovers. However, personally I think that Padini will still remain the choice for the youngster, young adults and middle class family.

Reading its Chairman's statement in Annual Report 2013, Padini is targeting young adults who tend to spend a lot but have limited disposable income. I am happy to hear that, simply because I am in the group they target! Of course, we do love to shop H&M and Uniqlo. However, young people like college students or young adults who just starting to work (like me), will still shop at Padini for simple round neck Tee, shorts, sandals, sling bags, etc etc., which are the typical weekend attire. Doesn't it a good sign for the investors who target to Padini?

Apart from that, through my personal experience and chit-chatting with friends about fashion, I realize that Padini apparel designs are more related to the Asian's / Malaysian's style, in term of the size and cutting. I guess this is the advantage for Padini to remain competitive in the sector.

This is my little point of view, I hope this is not a non-sense for you. (Haha!) Do comment or feedback to me, I am happy to learn and discuss. Appreciate! :)

Posted by kcchongnz > 2014-02-04 09:16 | Report Abuse

Posted by Horsefield > Jan 31, 2014 12:17 PM | Report Abuse

Joonism, you can refer to the links posted by Tan KW before. It explains your doubt above.

http://klse.i3investor.com/blogs/kianweiaritcles/44139.jsp
http://klse.i3investor.com/blogs/edu_morg_star/31605.jsp
http://klse.i3investor.com/blogs/edu_morg_star/31670.jsp

Below is excel template readily in Internet. Please do some modification for the said debt & minority interest adjustment.
http://www.focusinvestor.com/DiscountedCashFlows.xls


Excellent recommendation from Horsefield, especially the articles from Morning Star which explains in detail the discount cash flow analysis, the estimation of future cash flows and discount rate.

Well done.

Posted by kcchongnz > 2014-02-04 09:48 | Report Abuse

tiffanie,
Reading your post I have the view that you have a good future in investing. I appreciate your view here as a young person which is very relevant to Padini. But as a young person, you should first strive to safe and invest (wisely). Saving is not an easy thing to do in this high inflation environment.

Few people read the annual report like you do. Many "seasoned investors" don't even bother about the business of the companies they invest in. Yes the chairman's statement is important as you can have a grasp of where he will lead the company to in the future and facing competition which is inevitable in a capitalist country.

During this Chinese New Year, I have the opportunity to walk around MegaMall a couple of times. I personally could see there were more shoppers in Uniqlo than Padini stores. Talking to my young children, they seem to prefer Uniqlo then Padini. So I am not sure if it is a trend among the youngsters. If so, there certainly are stiff competitors for Padini. But Padini has more stuff than Uniglo and H&M.

If there is this stock of Uniqlo and Padini with everything equal, I may invest in Uniqlo rather than Padini. But there is no Uniglo stock (unless one invests through Wing Tai). And there is this price issue. There is no price-value relationship for Uniqlo, whereas there is for Padini as described in this blog. Secondly with the proven management capability of Padini, and reading through the Chairman's statement, I don't think they will sit still and do nothing to improve their business.

Hence I still think Padini is a good investment in view of its high efficiencies and reasonable price, and a proven capable management.

Posted by tiffanie > 2014-02-04 18:26 | Report Abuse

@kcchongnz, thanks a lot for your comments to me, it is definitely a very precious encouragement for me. Thanks for your advice as well. I agree strongly that young people like me should save and spend money wisely, and more importantly, to study and learn to invest. As a beginner, I can only start small due to the limited modal. That's why every cent becomes important to me and I have to make sure every single cent would help to grow my "snow ball". (Haha.)

I agree your point of view that young people would prefer Uniqlo than Padini. Anyway, hopefully Padini management will react wisely. Perhaps it is the time for Padini to refresh its brand name to remain competitive.

Thank you for your sharing. I learn so much while reading your analysis and the comments. They are so valuable to me! :)

Posted by kcchongnz > 2014-02-04 19:18 | Report Abuse

tiffanie,

I am amazed of your language and communication skill, and above all your mature thinking about investment. Keep improving yourself by reading the books and articles by the investment giants such as Warren Buffet (Letters to shareholders of Berkshire Hathaway), Charles Munger, Peter Lynch (One up wall street), Joel Greenblatt (you can be a stock market genius too), Howard Marks (the most important thing illuminated), Seth Klarman (Margin of safety), Philip Fisher (Common stocks and uncommon profit), Aswath Damodaran on valuations etc.

Also I encourage you to read some of my articles below:
http://klse.i3investor.com/blogs/kcchongnz/45373.jsp
http://klse.i3investor.com/blogs/kcchongnz/45226.jsp
http://klse.i3investor.com/blogs/kcchongnz/45032.jsp
http://klse.i3investor.com/blogs/kcchongnz/44995.jsp
http://klse.i3investor.com/blogs/kcchongnz/44344.jsp

Posted by tiffanie > 2014-02-04 22:45 | Report Abuse

@kcchongnz, again, thousands thanks for your advise and generosity! This encourages me very much to move on! I have a long way to improve and a lot to learn. The books and your articles that you recommended must be a treasure for me. Thank you and I promise will study them properly. Thank you! :)

Posted by bigFAT > 2014-02-12 23:58 | Report Abuse

downtrending counter again..careful...good counter? excellent disposal also!!! don't be trapped

Posted by wattapi > 2014-02-13 00:05 | Report Abuse

oredi loss money...dunno uniqlo,h&m..mean dun know risk

Posted by kcchongnz > 2014-02-13 09:15 | Report Abuse

Posted by wattapi > Feb 13, 2014 12:05 AM | Report Abuse

oredi loss money...dunno uniqlo,h&m..mean dun know risk


"oredi loss money?" What is oredi? What is "loss money"?

Which year or quarter you refer to that Padini "oredi loss money"?

"dunno" uniqlo, h&m means "dun" know risk? Hah!!!!

Posted by ladzatz > 2014-02-13 17:55 | Report Abuse

kc why the graph starts the reading from right...many people not seeing thoroughly may be confuse and dump the stock!!!

Posted by wattapi > 2014-02-13 17:58 |

Post removed.Why?

Posted by wattapi > 2014-02-13 17:59 | Report Abuse

old man alwiz want to win...kena challenge terus letup

Posted by GenghisHoe > 2014-02-14 07:30 | Report Abuse

Hi kcchongnz, wattapi refers to the current price as compared to your present price aforesaid (at RM 1.74), so on the surface, he judged a loss on PADINI -- a fool who did not care about the business itself but purely on the share price movement.

kcchongz, do you have any ebooks on the below recommended books by you? If yes, can you kindly share with me? By the way, I'm a neophyte in the stock market and hope to learn from you as previously I glanced through your articles that really showed how to put those jargons -- financial measures into action...

"Keep improving yourself by reading the books and articles by the investment giants such as Warren Buffet (Letters to shareholders of Berkshire Hathaway), Charles Munger, Peter Lynch (One up wall street), Joel Greenblatt (you can be a stock market genius too), Howard Marks (the most important thing illuminated), Seth Klarman (Margin of safety), Philip Fisher (Common stocks and uncommon profit), Aswath Damodaran on valuations etc."

Also, can you share any books about the author, Charles Munger?

Nice to meet you.

Posted by kk123 > 2014-02-14 07:52 | Report Abuse

Padini not that great compare to wingtai

Posted by Hulk > 2014-02-14 08:06 | Report Abuse

kk123, wingtai got great EPS>30sen in 2012, PE=7.
Padini got PE of 13, but the dividend yield is better than wingtai.
And, Padini is in net cash condition.

Posted by kk123 > 2014-02-14 08:10 | Report Abuse

Padini would be a good company if u discovered it few years ago
Now unless there is new growth I don't see any rerating catalyst
Wingtai sort of its that "growth" stock now
Ok I don't own any Padini or wtm share

Posted by Hulk > 2014-02-14 08:15 | Report Abuse

kk123, thank you for the info.
I hold some Padini, just for the dividend purpose.
I think i will study Wingtai too.

Posted by kcchongnz > 2014-02-14 13:21 | Report Abuse

Posted by GenghisHoe > Feb 14, 2014 07:30 AM | Report Abuse

Also, can you share any books about the author, Charles Munger?

Somebody got the ebook by Seth Klarman, "Margin of Safety" from the net before. it is a good book. Try finding it.

I don't know of any book by Charles Munger. There are some philosophies of his in the net.

Posted by GenghisHoe > 2014-02-15 08:50 | Report Abuse

Hi kcchongnz, thanks! May I have your email? I would like to make friend with you and learn from you how to analyse a company wisely. Text me at boaster_kokhoe@hotmail.com if you accept to make friend with me. XÞ

Posted by sense maker > 2014-02-15 11:57 | Report Abuse

No one mentioned Zara and G2000 which also give Padini a good run for its money, in addition to H&M, Uniqlo and myriads of other lesser-known garment names.

Posted by GenghisHoe > 2014-02-16 11:09 | Report Abuse

Hi sense maker, may we make a friend? Nice to meet you ya. If not forgotten, you had vast working experience in China. XÞ

Posted by freecooper > 2014-02-16 16:53 | Report Abuse

Hi kcchongnz, it is always great to read your articles! Do you mind teaching us how you get the Free Cash Flow amount of RM 68777 thousand? Do you use the annual report or audited account or the average of free cash flow past few years (as you did for KFIMA)? Hope you can guide us in this! TQVM

Posted by kcchongnz > 2014-02-16 17:57 | Report Abuse

Appended below is the FCF for Padini for the last 5 years. Whether you extract from audited accounts or annual reports, they should be the same.

Year 2013 2012 2011 2010 2008
CFO 161629 76728 30792 111276 80585
Capex -16117 -26836 -24030 -27677 -22465
FCF 145512 49892 6762 83599 58120

As you can see CFO and FCF are lumpy, very lumpy actually. I would be too optimistic if I take last year's FCF of 145.5m, or extreme pessimistic if taking 2011's FCF of 6.8m only. Don't you agree?

So I compute the recent 5 years FCF and used that as the base. The average 5-year FCF of 68.8m appears to be reasonable when compared to the rest of the numbers.

So it is a matter of judgement of the future FCF which is very subjective. Hence if I want to confirm my thesis of investing in this share, i try to have conservative assumptions. Also I would have to use other methods of valuations in tandem.

Posted by kcchongnz > 2014-02-16 21:48 | Report Abuse

Katsenelson’s absolute PE of Padini

For those who are interested in this valuation method, you can refer to the following link:

http://klse.i3investor.com/blogs/kianweiaritcles/36512.jsp

This model derives the intrinsic value of the stock based on the following five conditions.
1. Earnings growth rate
2. Dividend yield
3. Business risk
4. Financial risk
5. and earnings visibility

The model first starts with a no growth P/E ratio of 8 (original), or an earnings yield of about 12%, and then adjusted according to its growth rate and dividend yield to derive a basic P/E. The adjustment can be extracted from Table 3 below:


Padini’s revenue and net profit has been growing at 16% and 17% respectively for the last 6 years. But this growth has slowed down somewhat. It is prudent to assume that the expected growth in the future to be 5%. Basic PE for Padini with an expected growth rate of 5% and a dividend yield of 5.0% is,

Basic PE = 8 + 0.65*5.0 + 5.0 = 16.2

Business risk: PADINI’s business has high efficiencies with high return of assets of 17% and high return of capital of 45%. It has quite stable and reasonable operating profit margins of more than 15%. Its cash flow from operations is also stable, about the same as its net income. It has stable and high free cash flow every year, averaging about 10% of revenue. Cash return (FCF/IC) is also great. However there is some keen competition for its products recently. So neither premium nor discount is applied here to be prudent.

Financial risk: PADINI has a healthy balance sheet. Hence a discount of 5%is applied to the financial risk.

Earnings visibility: Again, as competition is creeping in, we assume the earnings for the future is uncertain. Hence a premium of 10% is applied to earnings visibility as a conservative assumption.

Hence the absolute PE for PADINI is:

Fair Value P/E = Basic PE x [1 + (1 - Business Risk)] x [1 + (1 - Financial Risk)] x [1 + (1 - Earnings Visibility)]
Fair value P/E = 16.2* [1+(1-100%)] *[1+(1-100%)] * [1+(1-120%)] = 15.3
Earnings per share 2013= 13 sen
Fair value of Padini= 15.3*0.13 = RM1.99

Posted by AyamTua > 2014-02-16 21:51 | Report Abuse

noted and thanks for formulae .......

Posted by freecooper > 2014-02-16 22:39 | Report Abuse

hi kcchongnz, thank you very much for your explanation on how you derived your FCF for the computation of intrinsic value by DCF valuation.

On the other hand, for absolute PE for PADINI based on your assumptions, shouldn't the fair value P/E
= 16.2*[1+(1-100%)]*[1+(1-95%)]*[1+(1-110%)] = 15.31??

TQ

Posted by GGmalaysia > 2014-02-16 23:08 | Report Abuse

as far as i know, H&M do not attract much men design too fast to be outdated, and uniqlo do not attract many women.their design are dull and only good for males

ok so here's the catch, what i forsee that if economy is good, pasar malam will be the first 1 to die. people from lower income tends to buy padini (upgrade standard lah, whatelse?)

if economy down? hermes, AX and raplh lauren will lose moeny, higher income shifting to afforable clothing.

so if padini is situated in middle range. it will never die off. their T-shirts are attractive thou

Posted by kcchongnz > 2014-02-16 23:29 | Report Abuse

Posted by freecooper > Feb 16, 2014 10:39 PM | Report Abuse

hi kcchongnz, thank you very much for your explanation on how you derived your FCF for the computation of intrinsic value by DCF valuation.

On the other hand, for absolute PE for PADINI based on your assumptions, shouldn't the fair value P/E
= 16.2*[1+(1-100%)]*[1+(1-95%)]*[1+(1-110%)] = 15.31??

freecooper, yeah the fair value P/E is 15.3, and that was what I got from the excel sheet, except that I did not change the numbers in the formula which was in original word document when I copied and pasted it.

Thanks for pointing out the errors.

Posted by wayneteo > 2014-02-17 13:13 | Report Abuse

Besides Padini corp, one of the company that under Padini which is Brands outlet and P&CO that under Yee Fong Hung SB also contribute quite a lot of revenue into the company, which is currently second largest revenue under their 5 trading subsidary companies. I hope that the new stores that have opened since the beginning of the 2014 financial year + those in the pipeline will boost the earning ahead. Hope Padini will up to its fair value as calculated by Kcchongnz.

Posted by kcchongnz > 2014-02-26 22:53 | Report Abuse

Posted by wayneteo > Feb 17, 2014 01:13 PM | Report Abuse

Besides Padini corp, one of the company that under Padini which is Brands outlet and P&CO that under Yee Fong Hung SB also contribute quite a lot of revenue into the company, which is currently second largest revenue under their 5 trading subsidary companies. I hope that the new stores that have opened since the beginning of the 2014 financial year + those in the pipeline will boost the earning ahead. Hope Padini will up to its fair value as calculated by Kcchongnz.


Posted by kcchongnz > Feb 4, 2014 09:48 AM | Report Abuse X

Secondly with the proven management capability of Padini, and reading through the Chairman's statement, I don't think they will sit still and do nothing to improve their business.

Hence I still think Padini is a good investment in view of its high efficiencies and reasonable price, and a proven capable management.


wayneteo, thanks for your valuable input.

Padini just announced its quarterly results ended 31st December 2013. Its revenue and net profit increased by 13% and 48% respectively compared to the corresponding quarter for fy 2013.

Yes, there are competitions from uniqlo, H&M, Zara, G2000 etc. there have been competitions all this while. However it has been proven that the management of Padini would face the challenge and bring Padini to the next phase of growth. It does appear so for the results of the last two quarter, doesn't it?