Padini Holdings Bhd 
(May 20, RM1.38)
Upgrade to hold with a higher target price (TP) of RM1.38 from RM1.20: After disappointing earnings in the first two quarters, Padini Holdings’ third quarter ended March (3QFY15) results improved substantially. 

The group reported stronger core earnings of RM27 million (an increase of 29% year-on-year, an increase of 69% quarter-on-quarter), boosted by higher revenue as consumers purchased ahead of the goods and services tax (GST) which was implemented on April 1, new shops that opened during the period, and a better product mix, which led to higher gross margins in 3QFY15 of 44% compared with 41% in 2Q. 

This lifted nine-month FY15 (9MFY15) earnings to RM62 million, accounting for 86% and 76% of our and consensus’ full-year estimates respectively. The group declared a 2.5 sen dividend per share (DPS) for the quarter, bringing 9M DPS to 7.5 sen.

While we acknowledge that our FY15 earnings forecast would seem to be conservative in view of the stronger-than-expected pre-GST purchases and improved margins in 3Q, we remain cautious that 4Q earnings (from April to June) could weaken considerably after the implementation of GST in April. 

We have thus raised our FY15 forecast (F) earnings slightly by 5% due to the stronger-than-expected 3Q results, but maintain FY16F to FY17F earnings. Our FY15 net profit estimate is 6% below consensus.

Reflecting the earnings revisions, we have raised Padini’s TP to RM1.38, based on an unchanged price-earnings ratio of 12 times. Upgrade to “hold”. — Alliance DBS Research Sdn Bhd, May 20

This article first appeared in The Edge Financial Daily, on May 21, 2015.