Padini still has potential to recover

by LYDIA NATHAN / pic credit:

PADINI Holdings Bhd has potential for further recovery underpinned by its value-for-money offerings and the closure of its underperforming outlets, despite near-term weakness in earnings due to the recent rise in Covid-19 cases.

RHB Investment Bank Bhd, in a note yesterday, viewed Padini as a quality cyclical proxy to ride on the recovery wave in the financial year 2022 (FY22) once mass vaccination is achieved.

“In addition to improving shopper traffic observed at its outlets since the relaxation of the second Movement Control Order (MCO 2.0) last month, the gradual broader-based reopening of the economy, following the inoculation programme, will lead to the normalisation of footfalls being sustained,” the investment bank stated.

The fashion brand’s solid branding and value-for-money product offerings continue to remain competitive against the backdrop of increasingly cautious consumer spending, RHB added.

“While there has been a shift in preference for online shopping over physical stores, online sales still make up a small portion of sales at this juncture, pointing to the dependency on the performance of physical stores, which should be further supported following the closure of 10 underperforming stores.

“We also expect Padini to continue gaining robust bargaining power with landlords, as market consolidation phases out its competitors, allowing it to gain market share,” RHB explained.

RHB maintained its ‘Buy’ call on Padini with a higher target price of RM3.50 from RM3.25, which represents a 21% upside and circa 4% FY22F yield in June.

It noted that Padini’s current price is attractive and foresees the potential for valuations to be re-rated back to mean or above when investors rotate into cyclical sectors more meaningfully.

Padini’s shares have been trading slightly higher year-to-date, rising by five sen or 1.7% from RM2.89 at the start of the year.

Boosted by the gradual easing of the Conditional MCO in early April, its share price hit a 52-week high of RM3.37 before erasing gains in the second half of the month and trading flat in May.

Padini’s shares last traded four sen or 1.38% higher from its previous close at RM2.94, valuing the company at RM1.93 billion.

“Essentially, the recovery trope is still intact despite the recent resurgence in cases, as vaccination progress is underway and the fact that the reimposition of movement restrictions is being done in a targeted manner as opposed to a blanket nationwide lockdown,” RHB stated.

RHB has rolled forward its valuations to FY22, as it believes investors should look beyond the near-term earnings risk for Padini, arising from the spike in infection rates of late, and focus on the eventual cyclical recovery.