This article first appeared in The Edge Financial Daily, on December 14, 2015.

Padini Holdings Bhd
(Dec 11, RM1.85)
Downgrade to hold from buy with an unchanged target price of RM1.90: We expect near-term earnings to be underpinned by higher sales volume at its existing outlets due to aggressive promotional efforts, especially from its product bundling initiatives, as well as added earnings contributions from new stores.

We understand that Padini Holdings Bhd plans to open 16 new stores in financial year 2016 (FY16), including seven Padini Concept Stores and nine Brands Outlets.  

Our earnings forecasts are unchanged at this juncture, having imputed 11 new stores in FY16.

We believe Padini’s near-term earnings risks would still come mainly from intense competition in the fashion retail space with notable competitors such as H&M and Uniqlo, subdued consumer spending due to higher living costs and increasing costs from inflationary pressure on rental and wages, and the weak ringgit’s impact on its import content.

Padini’s balance sheet has remained healthy with a net cash position of RM127.8 million or 19 sen per share as at Sept 30.

Meanwhile, Padini’s positive free cash flow of RM80 million or 12 sen per share expected in FY16 is adequate to support a favourable net dividend per share of 10 sen this financial year, sustainable into FY17.

This translates into a net yield of 5.3%, which should support the share price. — Maybank Investment Bank Research, Dec 10