January 24, 2011

PADINI - Consumer sector still positive for 2011

Stock Name: PADINI
Company Name: PADINI HOLDINGS BHD
Research House: BIMB

Consumer sector
Recommend overweight
: Consumer stocks under our coverage, Aeon, Padini, Parkson and KFC produced performances in line with our expectations, with earnings coming in within our full-year estimates. The good performances were mainly driven by: 1) a convincing economic recovery; 2) improving consumer sentiment; 3) seasonal spike in festival spending (Chinese New Year, Hari Raya, school holidays and other public holidays); 4) capacity-expansion plans; 5) operational efficiencies (especially for Aeon and Parkson); and 6) favourable exchange rate movements for Chinese renminbi and Vietnamese dong against the ringgit in the case of Parkson.

Aeon opened two new stores last year. The expansion throughout the year has pushed up AEON's 9MFY10 revenue and net profit by 5% and 56% year-on-year. In 2011, AEON will invest RM200 million to open its 28th store in Rawang, which is expected to be completed within a year. Furthermore, another one or two new stores will be opened in 2011, in the northern part of Peninsular Malaysia, either in Penang, Sungai Petani or Ipoh.

Padini has been aggressively growing with seven new stores in 2010 to bring its total outlets to 233 (including consignment stores) in Malaysia and 97 franchise and dealers' stores overseas. The company is expected to continuously spread its wings, with annual capex of RM20 million. In addition to that, Padini is also aiming to expand its brands outlets business (selling other brands) and is currently working on the expansion efforts to open two more outlets in Kota Baru and Setapak.

As for Parkson, the group has been aggressively leading its retail peers in its expansion drives with eight new stores in Malaysia, China and Vietnam. For 2011, it aims to open five stores in China and one or two stores in Malaysia and Vietnam, which would bring a total of at least 95 stores by year-end. For that, some RM200 million is expected to be spent this year.

We are positive about the retail players' expansion drives as this strategy is the key to spur strong growth in revenue and earnings. This is also in tandem with improving consumer sentiment on the back of positive economic growth domestically and in Asia.

KFC plans to continuously expand its restaurants in 2011. It has said it will open 30 new KFC restaurants, 25 Ayamas outlets and two to three RasaMas restaurants locally. KFC also plans to increase the number of its restaurants overseas. There will be one or two new restaurants opened in Brunei and Singapore. Meanwhile, in India, KFC expects to open more restaurants to increase its total number of outlets to 17 by end-2011.

In tandem with the strong economic growth (GDP growth for 3QFY10 of 5.3% and 2011F of 5.7%), consumer sentiment in Malaysia has been showing an improvement, reaching a two-year high at 115.8 points in September. We expect rising consumer confidence to continue in tandem with the positive economic growth, coupled with additional initiatives planned by the government to raise disposable income and spur domestic spending in Budget 2011 .

Therefore, we expect double-digit earnings growth for the companies under our coverage in FY11.

The prices of consumer goods have been continually on the uptrend driven by higher commodity prices globally. The strong surge in input prices over a short period will eventually impact consumer spending as inflation creeps up. For instance, consumer price index rose from 111.7 in January 2009 to 115 in November 2010.

Additionally, the government's intention to eventually remove most subsidies under the Economic Transformation Programme will hit consumer confidence and hence, spending, should disposable income not grow concurrently.

We are 'overweight' on the consumer sector with three 'buy' calls out of four stocks under our coverage, to be supported by the expected double-digit earnings growth in FY2011 and FY2012. We recommend a 'buy' call on Aeon (TP: RM7.30), and Parkson (TP: RM7.57), 'outperform' call on Padini (TP: RM1.22), and maintain our 'neutral' call on KFC (TP: RM3.97). ' BIMB Securities Research, Jan 24


This article appeared in The Edge Financial Daily, January 25, 2011.

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