‘Padini should cut China imports to be more cost-effective’
KUALA LUMPUR: Apparels manufacturer Padini Holdings Bhd must reduce its dependency on China in order to be more costeffective, says a local research house.
Currently, the company’s products are 70 per cent imported from China, 20 per cent sourced locally and 10 per cent from other countries, such as Cambodia, India, Bangladesh and Vietnam.
This is on the back of the company’s first quarter financial year 2018 results, in which revenue and profit before taxation decreased by about RM145 million (31.4 per cent) and RM12.5 million (23 per cent), respectively, compared with the same period last year.
In its filing with Bursa Malaysia, Padini said the results were mainly due to sales for Hari Raya festival, which fell in June this year, and the four days of special sales it held in the last quarter.
Selling and distribution expenses increased 9.1 per cent to RM7 million due to an increase in rental and staff costs as a result of more Padini Concept Stores (PCS) and Brand Outlet (BO) stores opened during the quarter.
Overall, Padini’s profit margins had improved slightly to 9.9 per cent from 9.2 per cent, contributed mainly by an increase in other income and gross profit margin, and moderated by the rise in selling and distribution cost, said Padini.
TA Securities Holdings Bhd said Padini’s first-quarter adjusted net profit came in at 18 per cent of the research house’s and consensus full-year estimates.
“We deem this broadly within our full-year forecast as financial year 2018 earnings are expected to be back-end loaded,” said the research house in a recent report.
Padini also plans to open 12 new stores in financial year 2018, which comprise six PCS and six BOs.
Padini has already opened a total of four stores — two BOs and two PCS — in the first quarter of financial year 2018 within the Klang Valley and Johor.
Its management also guided that Padini will open a total of three stores (two PCS and one BO) in Phnom Penh, Cambodia, with an estimated capital expenditure of RM20 million.
“Hence, we project that Padini will have a total of 141 stores by the end of financial year 2018. Note that currently, Padini has a total of 126 stores.
“Although Padini is in the right position to expand and diversify its earnings, we are neutral on its Cambodian venture, as the earnings contribution is expected to be relatively minimal,” said TA said.
It is positive on this initiative as it believes it will help support gross profit margin for the company to return back to a comfortable above 40 per cent level, noting that for fiscal year 2017, Padini’s gross profit margin was 39.4 per cent.
The research house has maintained its “sell” call on Padini with an unchanged target price of RM4.67 per share.
“Upside risks to our call include higher-than-expected sales achieved, higher-than-expected number of stores opening in financial year 2018 and lowerthan-expected costs of sales as well as operating costs.”
AllianceDBS Research has, however, downgraded its recommendation for Padini to “fully valued” with an unchanged target price of RM3.55.
“We are taking a more bearish stance on the stock as we believe that Padini’s current valuation has priced in its near-term growth prospects.
“As such, we believe the stock has run ahead of its fundamentals,” said AllianceDBS.
The research house foresees stronger than expected top-line growth for Padini due to increased demand for its product offerings and a stronger-than-expected rebound in consumer spending.