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PADINI
FUNDAMENTAL ANALYSIS
Financial Year 2015 (30 Jun 2015)
L. C. Chong
1 December 2015
DISCLAIMER
I am NOT an investment advisor nor a financial advisor, and no information provided
here is to be interpreted a...
DECLARATION OF INTEREST
• At the time of writing, I owned shares of PADINI.
KEEP IN TOUCH
http://lcchong.wordpress.com
https://goo.gl/jjkq4P
SCOPE
• Figures and ratios are based on the figures reported in Annual Report or the latest
Q4 Quarterly Report (QR)
• Unl...
CHANGES
• 6 Nov 2015 – First write up of PADINI in PowerPoint format
REFERENCES
• Apparels (KLSE) – Peer Comparison
BUSINESS PROFILE
• Principally engaged in the garment industry in Malaysia
• Distributes and retails adult’s garments, chi...
BUSINESS PROFILE (CONT.)
• Its products are distributed under the brand name of Vincci, Vincci+, Vincci
Accessories, Tizio...
BUSINESS PROFILE (CONT.)
• Five reportable segments, which are determined by each of its subsidiaries
Companies Brands
Vin...
OWNERSHIP SUMMARY
INDIVIDUALS/INSIDERS
49%
INSTITUTIONS
30%
PUBLIC AND OTHER
21%
TOP 5 SHAREHOLDERS
PANG CHAUN YONG
76%
SOMERSET CAPITAL
MANAGEMENT LLP
7%
SAMARANG LLP
7%
CAPITAL DYNAMICS ASSET
MANAGEMEN...
OWNERSHIP ANALYSIS
• PADINI mainly owned by individuals like Yong Pang Chaun and Min Yang Thian, but
institutional funds o...
ECONOMIC MOATS
• Cost Advantage
• Its EBITA margin declined over the years from 18.3% (FY11) to 11.8% (FY15), but its
marg...
ECONOMIC MOATS (CONT.)
• Intangible Assets
• Strong brand and regularly release new design
• The success of Padini is its ...
ECONOMIC MOATS (CONT.)
58.8%
50.8%
43.4%
37.8%
28.4%
-19.5%
27.7%
70.3%
10.1%
51.8%
0
50,000
100,000
150,000
200,000
250,0...
ECONOMIC MOATS (CONT.)
• Even if its ROIC was above 10%, but the ROIC was trending down in the past 5 years
due to increas...
BRAND POSITION
• Well recognized brand may be marketed across multiple product segments and
recognized as a leader in thes...
DIVERSITY OF DISTRIBUTION
CHANNELS
• Various channels:
• Free Standing Store
• Multi Brand Store
• Consignment counters
• ...
DIVERSITY OF DISTRIBUTION
CHANNELS (CONT.)
Source: Annual Report 2015
DIVERSITY OF PRODUCT
CATEGORIES
• The strategic business units possess different brands and offer distinguished and
differ...
STABILITY OF PRODUCT
• Products are moderately discretionary, with easily-delayed purchases certain under
even mild macroe...
PROFITABILITY
18.8% 18.3%
15.3% 14.9%
11.8%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
0
200,000
400,000
600,000
800,000
1,000,000
...
PROFITABILITY (CONT.)
• In the past 5 years, EBITA of PADINI maintained in the range of 100m to 130m, but
the growth is no...
PROFITABILITY (CONT.)
• The recent EBITA margin is 11.8%, and this can be rated as Ba (equivalent to
mediocre)
• If compar...
PROFITABILITY (CONT.)
0%
20%
40%
60%
80%
100%
2012-06-30 2013-06-30 2014-06-30 2015-06-30
Revenue by Operating Segment
Vin...
LEVERAGE & COVERAGE
0.37 x
0.33 x
0.25 x
0.34 x
0.27 x
0.00 x
0.05 x
0.10 x
0.15 x
0.20 x
0.25 x
0.30 x
0.35 x
0.40 x
2011...
LEVERAGE & COVERAGE (CONT.)
68.09 x
51.14 x
61.07 x
58.14 x
40.48 x
0.00 x
10.00 x
20.00 x
30.00 x
40.00 x
50.00 x
60.00 x...
LEVERAGE & COVERAGE (CONT.)
285.1%
313.9%
414.3%
295.6%
385.3%
0.0%
50.0%
100.0%
150.0%
200.0%
250.0%
300.0%
350.0%
400.0%...
LEVERAGE & COVERAGE (CONT.)
• PADINI’s leverage and coverage are very healthy
• Debt/EBITDA – 0.27x (FY15) (Aaa)
• EBIT/In...
LIQUIDITY
94
124
102
93
78
0
50
100
150
200
0
20
40
60
80
100
120
140
2011-06-30 2012-06-30 2013-06-30 2014-06-30 2015-06-...
LIQUIDITY (CONT.)
• Trend of cash conversion cycle is downtrend, and this is a positive sign where
PADINI’s liquidity is i...
LIQUIDITY (CONT.)
(25,929)
53,057
141,640
24,780
152,401
(102,632)
(30,178)
38,476
(85,699)
42,513
2011-06-30 2012-06-30 2...
GROWTH DRIVERS
• 19 Aug 2015 - Six Padini Concept Store & 6 Brands Outlet to be opened in FY16
• The strong retail presenc...
ISSUES/RISKS/CHALLENGES
• The implementation of the GST and subsidy rationalization program by the
government could potent...
ISSUES/RISKS/CHALLENGES (CONT.)
• Intensified competition – PADINI is facing intense competition in the clothes and
appare...
ISSUES/RISKS/CHALLENGES (CONT.)
• Intensified competition from online shopping portal, such as Lazada, Zalora, etc…
• 19 A...
SEASONAL OR CYCLICAL FACTORS
• The apparel industry experiences shifting demand, due primarily to cyclical
economic factor...
EXECUTION AND COMPETITIVE
POSITION
• Refer to Apparels (KLSE) – Peer Comparison
• Execution is well-above peers
• Leadersh...
SHAREHOLDER RETURN
Time Frame Date Bought at Original
Value
Dividend
Received
Unrealized
Gain/Loss
Current
Return
CAGR %
3...
SHAREHOLDER RETURN (CONT.)
0.0000
0.0200
0.0400
0.0600
0.0800
0.1000
0.1200
0.1400
0.1600
2011-06-30 2012-06-30 2013-06-30...
GOING FORWARD
• In my opinion, PADINI’s current valuation is very attractive. Its high dividend yield
help cushion market ...
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PADINI – Fundamental Analysis FY15

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Fundamental Analysis of Padini Holdings Berhad by L. C. Chong

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PADINI – Fundamental Analysis FY15

  1. 1. PADINI FUNDAMENTAL ANALYSIS Financial Year 2015 (30 Jun 2015) L. C. Chong 1 December 2015
  2. 2. DISCLAIMER I am NOT an investment advisor nor a financial advisor, and no information provided here is to be interpreted as a suggestion to buy or sell securities. Stock analysis in this presentation may not neutral because I have incorporated my risk appetite and principles in the analysis. All figures in MYR and in '000s, except per share data 2
  3. 3. DECLARATION OF INTEREST • At the time of writing, I owned shares of PADINI.
  4. 4. KEEP IN TOUCH http://lcchong.wordpress.com https://goo.gl/jjkq4P
  5. 5. SCOPE • Figures and ratios are based on the figures reported in Annual Report or the latest Q4 Quarterly Report (QR) • Unless there is a need, this analysis will not include financial figures reported in Q1, Q2 and Q3 • I will provide QR result highlights in my blog • Valuation is not covered in this analysis • I will provide valuation in my blog.
  6. 6. CHANGES • 6 Nov 2015 – First write up of PADINI in PowerPoint format
  7. 7. REFERENCES • Apparels (KLSE) – Peer Comparison
  8. 8. BUSINESS PROFILE • Principally engaged in the garment industry in Malaysia • Distributes and retails adult’s garments, children’s garments, ancillary products, maternity wear, ladies’ shoes, bags, belts and other accessories • Distributes its products through its free-standing stores, franchised outlets and consignment counters, which are located in local and oversea markets.
  9. 9. BUSINESS PROFILE (CONT.) • Its products are distributed under the brand name of Vincci, Vincci+, Vincci Accessories, Tizio, Padini Authentics, PDI, Padini, Seed, Miki, and P&Co, all of which are owned by the Group except the Tizio label • PADINI also utilises a number of lesser known house brands to market the merchandise that it offers for sale in its Brands Outlet stores.
  10. 10. BUSINESS PROFILE (CONT.) • Five reportable segments, which are determined by each of its subsidiaries Companies Brands Vincci Ladies’ Specialties Centre Sdn. Bhd. (“Vincci”) Tizio, Vincci, and Vincci Accessories Padini Corporation Sdn. Bhd. (“Padini Corporation”) Padini, Padini Authentics and PDI Seed Corporation Sdn. Bhd. (“Seed”) Seed and Seed café Yee Fong Hung (Malaysia) Sendirian Berhad (“Yee Fong Hung”) Brands Outlet and P&Co Mikihouse Children’s Wear Sdn. Bhd. (“Miki”) Miki Kids
  11. 11. OWNERSHIP SUMMARY INDIVIDUALS/INSIDERS 49% INSTITUTIONS 30% PUBLIC AND OTHER 21%
  12. 12. TOP 5 SHAREHOLDERS PANG CHAUN YONG 76% SOMERSET CAPITAL MANAGEMENT LLP 7% SAMARANG LLP 7% CAPITAL DYNAMICS ASSET MANAGEMENT SDN BHD 5% MIN YANG THIAN 5%
  13. 13. OWNERSHIP ANALYSIS • PADINI mainly owned by individuals like Yong Pang Chaun and Min Yang Thian, but institutional funds owned 27% of PADINI • Yong has been and still is the driving force of the group, and is still responsible for crafting the group’s strategies and plans • On the board are Yong’s wife Chong Chin Lin, his sister Yong Lai Wah, and his son Andrew Yong. • Yong, his wife, and his sister are major shareholders in the company via their interest in Yong Pang Chaun Holdings Sdn Bhd, which owns a 43.74% interest in the group as at June 30, 2014 • Another notable shareholder is icapital.biz Bhd, which holds 2.88% and is the third- largest shareholder.
  14. 14. ECONOMIC MOATS • Cost Advantage • Its EBITA margin declined over the years from 18.3% (FY11) to 11.8% (FY15), but its margin is still the highest in this industry • Switching Costs • Basically, there is no switching cost at all • Network Effect • Lower to Middle Income Group • Strong Concept store strategy and Brands Outlet
  15. 15. ECONOMIC MOATS (CONT.) • Intangible Assets • Strong brand and regularly release new design • The success of Padini is its retailing strategy that focuses on the different market segments. Each brand under the group provides a distinctive image and identity for its targeted market • Store presence and a distinctive store layout are part of the brand building strategy • Efficient Scale • A prominent retailer in the Malaysian market • Extensive branch network throughout the country.
  16. 16. ECONOMIC MOATS (CONT.) 58.8% 50.8% 43.4% 37.8% 28.4% -19.5% 27.7% 70.3% 10.1% 51.8% 0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 -30.0% -20.0% -10.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 2011-06-30 2012-06-30 2013-06-30 2014-06-30 2015-06-30 ROIC and CROIC Avg. Capex Avg. Invested Capital ROIC % CROIC %
  17. 17. ECONOMIC MOATS (CONT.) • Even if its ROIC was above 10%, but the ROIC was trending down in the past 5 years due to increase of inventory • PADINI’s CROIC was very volatile, but it is mainly due to increase of working capital in inventory • Under normal circumstances, it is able to maintain above 10% CROIC.
  18. 18. BRAND POSITION • Well recognized brand may be marketed across multiple product segments and recognized as a leader in these segments • Consumers have loyalty, but not exclusively, to the brand • Brand has a long term track record of revenue growth with low revenue volatility.
  19. 19. DIVERSITY OF DISTRIBUTION CHANNELS • Various channels: • Free Standing Store • Multi Brand Store • Consignment counters • Concept stores: • Padini Concept Stores (PCS) • Brands Outlet (BO) • Franchise Store • Dealer Store
  20. 20. DIVERSITY OF DISTRIBUTION CHANNELS (CONT.) Source: Annual Report 2015
  21. 21. DIVERSITY OF PRODUCT CATEGORIES • The strategic business units possess different brands and offer distinguished and different theme of products to cater to different customer segments Companies Brands Vincci Ladies’ Specialties Centre Sdn. Bhd. (“Vincci”) Tizio, Vincci, and Vincci Accessories Padini Corporation Sdn. Bhd. (“Padini Corporation”) Padini, Padini Authentics and PDI Seed Corporation Sdn. Bhd. (“Seed”) Seed and Seed café Yee Fong Hung (Malaysia) Sendirian Berhad (“Yee Fong Hung”) Brands Outlet and P&Co Mikihouse Children’s Wear Sdn. Bhd. (“Miki”) Miki Kids
  22. 22. STABILITY OF PRODUCT • Products are moderately discretionary, with easily-delayed purchases certain under even mild macroeconomic or cyclical factors, and historically verifiable • Demand is elastic, fashion risk/technological obsolescence is acute, and product substitution is easy.
  23. 23. PROFITABILITY 18.8% 18.3% 15.3% 14.9% 11.8% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 2011-06-30 2012-06-30 2013-06-30 2014-06-30 2015-06-30 EBITA Revenue EBITA Margin % Linear (EBITA Margin %)
  24. 24. PROFITABILITY (CONT.) • In the past 5 years, EBITA of PADINI maintained in the range of 100m to 130m, but the growth is not consistent • The margin declined consistently every year due to: • The implementation of the GST and subsidy rationalization program by the government could potentially hamper consumer spending. • Higher-than-expected operating expenses resulting from new store openings. • Padini is facing intense competition in the clothes and apparel retailer market segment especially with the entrance of foreign brands such as H&M and Uniqlo.
  25. 25. PROFITABILITY (CONT.) • The recent EBITA margin is 11.8%, and this can be rated as Ba (equivalent to mediocre) • If compare to other competitors in Malaysia, PADINI margin can be considered the highest.
  26. 26. PROFITABILITY (CONT.) 0% 20% 40% 60% 80% 100% 2012-06-30 2013-06-30 2014-06-30 2015-06-30 Revenue by Operating Segment Vincci Padini Corporation Seed Yee Fong Hung Miki Others
  27. 27. LEVERAGE & COVERAGE 0.37 x 0.33 x 0.25 x 0.34 x 0.27 x 0.00 x 0.05 x 0.10 x 0.15 x 0.20 x 0.25 x 0.30 x 0.35 x 0.40 x 2011-06-30 2012-06-30 2013-06-30 2014-06-30 2015-06-30 Debt / EBITDA
  28. 28. LEVERAGE & COVERAGE (CONT.) 68.09 x 51.14 x 61.07 x 58.14 x 40.48 x 0.00 x 10.00 x 20.00 x 30.00 x 40.00 x 50.00 x 60.00 x 70.00 x 80.00 x 2011-06-30 2012-06-30 2013-06-30 2014-06-30 2015-06-30 EBITA/Interest
  29. 29. LEVERAGE & COVERAGE (CONT.) 285.1% 313.9% 414.3% 295.6% 385.3% 0.0% 50.0% 100.0% 150.0% 200.0% 250.0% 300.0% 350.0% 400.0% 450.0% 2011-06-30 2012-06-30 2013-06-30 2014-06-30 2015-06-30 FFO to Debt
  30. 30. LEVERAGE & COVERAGE (CONT.) • PADINI’s leverage and coverage are very healthy • Debt/EBITDA – 0.27x (FY15) (Aaa) • EBIT/Interest – 40.48x (FY15) (Aaa) • Retained Cash Flow to Debt – 385.3% (FY15) (Aaa)
  31. 31. LIQUIDITY 94 124 102 93 78 0 50 100 150 200 0 20 40 60 80 100 120 140 2011-06-30 2012-06-30 2013-06-30 2014-06-30 2015-06-30 Cash Conversion Cycle Days In Inventory Days In Receivables Days Payable Outstanding Cash Conversion Cycle
  32. 32. LIQUIDITY (CONT.) • Trend of cash conversion cycle is downtrend, and this is a positive sign where PADINI’s liquidity is improving • Days Sales of Inventory has been reducing since FY2012. This means number of days that PADINI sell out stock reduced.
  33. 33. LIQUIDITY (CONT.) (25,929) 53,057 141,640 24,780 152,401 (102,632) (30,178) 38,476 (85,699) 42,513 2011-06-30 2012-06-30 2013-06-30 2014-06-30 2015-06-30 Free Cash Flow to Firm WC Changes - Inventory PADINI’s FCFF was very volatile, but it is mainly due to increase of working capital in inventory. Under normal circumstances, it is able to achieve quite a healthy level of free cash flow.
  34. 34. GROWTH DRIVERS • 19 Aug 2015 - Six Padini Concept Store & 6 Brands Outlet to be opened in FY16 • The strong retail presence and long retail experience of the Group would enable the Group to weather the competition in the retail sector • Strong pipeline of new malls opening in Malaysia • Vincci Online (not ready at the time of writing) – Increase market exposure via online presence.
  35. 35. ISSUES/RISKS/CHALLENGES • The implementation of the GST and subsidy rationalization program by the government could potentially hamper consumer spending • Macroeconomic headwinds simmer down – hamper consumer spending • Higher-than-expected operating expenses resulting from new store openings • PADINI yet to demonstrate successful execution of global growth strategies, which benefit from their ability to deliver credible organic growth opportunities and further diversification.
  36. 36. ISSUES/RISKS/CHALLENGES (CONT.) • Intensified competition – PADINI is facing intense competition in the clothes and apparel retailer market segment especially with the entrance of foreign brands such as H&M and Uniqlo • Nevertheless, PADINI’s strong and expanding store network had given PADINI an added edge due its ability to reach out to less urban areas • PADINI’s wide range of merchandise also ensures the Company remains relevant to the various consumer needs. For instance, its presence in the value-for-money segment via BO.
  37. 37. ISSUES/RISKS/CHALLENGES (CONT.) • Intensified competition from online shopping portal, such as Lazada, Zalora, etc… • 19 Aug 2015 – Over the short-term, costs will continue to stay at escalated levels due to the gestation phase of new stores opening this year (6 Padini Concept Store & 6 Brands Outlet) • Shortage of skilled labour – It requires different abilities to successfully manage a large specialty retail store base as compared to a wholesale model which sells to a small number of large retailers • Higher level of fixed costs due to the fixed costs of operating a store.
  38. 38. SEASONAL OR CYCLICAL FACTORS • The apparel industry experiences shifting demand, due primarily to cyclical economic factors and changes in fashion trends • Spending is discretionary in nature, and can be deferred during weak economic times as the consumer can ‘shop the closet’ instead of buying new product • Demand is also a function of the vagaries of fashion – ‘gotta have it now’ often quickly turns into ‘wouldn’t be caught dead in this’ tomorrow • Few brands in this industry have demonstrated consistent and enduring appeal.
  39. 39. EXECUTION AND COMPETITIVE POSITION • Refer to Apparels (KLSE) – Peer Comparison • Execution is well-above peers • Leadership is evident in multiple markets across varying geographies, as well as within the company’s product category(ies) with some potential fragmentation acknowledged • Online is growing and in early stages of integration, laying the groundwork for future multi-channel capability • Market position can be defended against most types of threats, with even minor market share losses unusual.
  40. 40. SHAREHOLDER RETURN Time Frame Date Bought at Original Value Dividend Received Unrealized Gain/Loss Current Return CAGR % 3-Y 5 Nov 2012 6.45 6,450 580 110 7,041 3.0% 5-Y 26 Nov 2010 5.31 5,310 1,010 1,250 7,570 7.4% Assumptions: 1. Commission paid is ignored in this simulation 2. The current price is 6.56 (as of the time of writing) 3. Unit purchased is 1,000.
  41. 41. SHAREHOLDER RETURN (CONT.) 0.0000 0.0200 0.0400 0.0600 0.0800 0.1000 0.1200 0.1400 0.1600 2011-06-30 2012-06-30 2013-06-30 2014-06-30 2015-06-30 DPS DPS Linear (DPS)
  42. 42. GOING FORWARD • In my opinion, PADINI’s current valuation is very attractive. Its high dividend yield help cushion market dips • I still cautious on PADINI’s near-term earnings outlook due to risks of lower margins and profits from absorbing the GST amid the weakening consumer sentiments • Over the longer term, when macroeconomic headwinds simmer down, the company is well positioned to ride on the up-wave, having already established its store presence • I will continue to hold and accumulate this stock.

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