March 14, 2012

Padini (BUY, FV RM1.80, Last price RM1.45)

Stock Name: PADINI
Company Name: PADINI HOLDINGS BHD
Research House: OSKPrice Call: BUYTarget Price: 1.80




We recently had a follow-up visit to Padini, which is one ofour Top Buys for 2012. We continue to like the stock's resilient performanceamid an increasingly turbulent operating environment. Despite the volatility incotton prices and intense competition in the retail space, we remain confidentthat the company's high inventory and wider retail network relative to itspeers will hold it in good stead. Maintain BUY, with a FV of RM1.80, based on14x FY12 EPS.

Gaining prominence.After providing 3 Good reasons (Good track record, Good growth story and Goodpricing) why investors should like Padini in our previous report, the shareprice has rallied by a strong 13.3% to RM1.45 in just one month. Although the volatilityin cotton prices and entry of new competitors might affect garment retailers ingeneral, we continue to believe that Padini will stand strong amid the toughenvironment given its high inventory level and wide network of outlets versusits peers.

Unfazed by thechallenges ahead.  From a macroperspective, India's cotton export ban will definitely affect textile andgarment retailers but we believe Padini will be able to weather the storm inview of its high level of inventory and cash pile. The entry of big overseasretailers such as Top Shop, Zara, MNG, Cotton On and Uniqlo in recent years hascertainly raised the bar for local garment retailers. Another fashion retailer,Hennes & Mauritz's (H&M), will also open its first store in Malaysiathis year. We think that Padini's strong  retail network and widecustomer base will continue to support its growth, although the competition isbecoming tougher.

Spreading its wingsoverseas.  FJ Benjamin Holdings, anindustry leader in brand building and management, and the development of retailand distribution networks, has approached Padini  with the view to  franchising the 'Vincci' brand  (under the brand name of 'VNC') in Indonesia.The VNC franchise stores in Indonesia have been languishing  due topricing problems  relating to a  luxury tax on its  products. The discussions are still at theearly stage but if the deal goes through, it would see Padini making asignificant breakthrough in expanding overseas. Similarly, the group is also inthe midst of revamping its franchisee model in Thailand.

Maintain BUY.Going forward, the group aims to introduce apparel based on overseas styles andfashion at a faster pace to Malaysians by ramping up its efficiency and come upwith  new garments in 3 to  4 weeks. Maintain BUY, with  the stock's fair value unchanged at RM1.80.

Source: OSK188

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