Is Padini worth to invest? [Update Mar 2021]

This is an updated post from the original article that was previously written back in May 2020. Padini has been in my portfolio since the first MCO as I bought the dip in Apr 2020. Since then, the prolonged pandemic has resulted in the significant downturn of performance in Malaysia's retail industry, and Padini's business was severely affected as well. Let's take a look on their latest performance in FY2020.

I have to admit I enjoy shopping, by average, the dollars that I spent on clothes are around $50 per month (Update: oops I no longer spend that much on clothes since the day I started to focus on my goal - FI) . Whenever I shop in AEON or other malls, Padini is always in my list (despite consistently reminding myself that it will just be another window-shopping trip, but somehow, I will end up buying some apparel products from Padini or Vincci or Seed XD). I have to say the price is reasonable and there are plenty of choices for their clothes or shoes. Hence, I believe this is the reason I wanted to look deeper into this company.

Upon research and reading up on Padini, I have established several criteria to evaluate the Padini group before deciding if I should invest my capital.

1. Increasing earnings per share (EPS) over the past 10 years

Ideal EPS CAGR rate should be at least around 10%. To be honest, it is very difficult to find a company with consistent EPS growth rate at this ideal rate. Based on my analysis, Padini has an impressive yet consistent EPS growth rate (11%) over the past 10 years. Further there is a consistent PBT growth (11%) supported by the increasing revenue (15%).

However, we do note there is a decrease in growth in FY2019 for both PBT and EPS, despite growing revenue. The reason for such decrease is mainly due to the adoption of MFRS 16 which resulted in a RM25mil increase in depreciation.

[Update Mar 2021]: In line with my expectation, the Group's revenue has declined by 24% while PBT has plummeted by 51%. Despite various challenges arising from the intensifying competition and pandemic lockdowns in Malaysia, the group was able to remain profitable in FY2020.

2. Consistent and increasing operating cash flow

Overall, cash flow from Padini's normal operating activities has a 3% CAGR despite its fluctuation over the years. The company's healthy balance sheet implies that Padini will not face any tight cash flow problem in the near term, although it is stuffed with the unsold stocks that are piling up.

Based on quarter result as at 31 Dec 2019, Padini’s cash and bank balances were at RM586 million, while its total borrowings stood at only RM11 million. This amount of cash pile would enable the company to retain a flexible cash supply to meet its business operation demands as well as dividend payment.

[Update Mar 2021]: The Group's revenue and profit have been severely affected as shown above, however their management of cash flow is superb, as bank loan is decreasing with the growing operating cash flow.

3. ROE (>12%) and ROA (>7%)

For my third criterion, I would be looking at high and consistent Return on Equity (ROE) and Return of Asset (ROA). The ideal ROE should be above 12%, and above 7% for ROA over the past 10 years. The average of Padini's ROE is around 36% and ROA is around 17%.

[Update Mar 2021]: Padini’s return on both equity (ROE) and asset (ROA) falls to ten-year low due to the decreasing footfall since March’20.

4. Price per earnings ratio

Next, let's look at the price/earnings ratio (P/E). The current P/E ratio as of 12 May 2020 is 10.76, which is lower than the historical record 12.63. It denotes that the stock is currently not over-priced in comparison to its own average 10-year P/E ratio.

Further I have compared P/E with companies from same industry. Padini's P/E is lower than the average P/E of its peers which is around 13.21, justifying that the current share price is not over-valued.

[Update Mar 2021]: Padini has a high P/E as of 10 Mar 2021 which is 60.84 (share price: RM 2.89) as investors are expecting high growth rate in the near future with the recent start of Covid-19 vaccination drive.

5. Debt over equity ratio

How about the debt of this group? The ideal D/E ratio is preferably below 0.5 and yes, Padini has managed its liability well since it has an average D/E ratio of 0.49.

[Update Mar 2021]: Excluding the lease liabilities (impact of MFRS 16), the Group has managed its liability well as it has a lower D/E ratio compared to FY2019.

6. What is its competitive advantage and future outlook?

(i) Strong brand and market position in Malaysia

Padini group (incl. of Padini Concept Store and Brands Outlet) has established a strong brand name within Malaysia, since every household has definitely heard of it. Further, based on market position, it has established a strong customer base in contrast to other competitors such as Parkson and Bonia.

I personally have visited these stores and I believe some of you also noticed that Padini is usually more crowded than Parkson or Bonia.

(ii) Conventional physical outlet is no longer an advantage?

Sometimes people would prefer to buy from stores as they are able to test try in fitting room as well as able to feel the product quality (70% of my clothes are from stores), in contrast to online shopping (only visual provided).

However, due to recent Covid-19, the changes in shopping pattern will be distinct from the past, as social distancing will continue to be part of our daily routine after the MCO. We could not deny the fact that online shopping is getting more popular and convenient since customers will not need to move out from their comfort zone. Padini might have to adapt or modify their modus operandi to e-commerce platform in order to regain their sales in near future. And yes, in May'20, Padini has initiated their first special Facebook Live to attract buyers by giving free shipping fee and shopping bag (yayyy).

(iii) Future outlook

Based on the AGM minutes, business operation generally focused on branding and retailing, and management has no intention to invest in factories that manufacture garments. Further, compared to domestic operation, the overseas markets (Cambodia and Thailand) are still at infant stage. Management intent to expand its oversea markets to increase market presence in Asia, especially ASEAN countries.

Another primary concern for the future would be the weaker consumer spending as the footfall at retail malls is expected to decline during the Covid-19 outbreak. However, based on a recent article from The Edge*, it says that as the situation normalises, consumer spending is likely to rebound in 2H2020 due to the deferred spending from earlier part of the year. What do you think?

[Update Mar 2021]: Malaysia finally has kicked-off its nationwide vaccination program on Feb 2021 and economists predicted that Malaysia would be able to revive its economy starting the third quarter of this year, depending on the smooth implementation of the vaccination program.

Indeed, mall and retail industry will recover gradually and surely over a longer time frame when normalcy returns. However, let's not forget the intense competition with the penetration of international players (e.g. Taobao) which led to situation whereby customers can easily switch brands when there are cheaper offers for better value.

I realized the retail landscape has became very different from what it was five years ago. In this era, with the availability of technology, customers have became more selective when shopping as they can easily reach out for more choices, with just one click away.

7. Low CAPEX for maintenance of current operation?

Next, I personally love to identify business with low annual maintenance cost, hence company does not need to spend a significant amount of their profit to maintain the business operation. I would prefer a business model where profit retained will be reinvested for expansion or R&D, of course redistributing the profit back to shareholders will be good too :)

For Padini, its business nature is mainly in retail and distribution, hence not much manufacturing machinery involved. Further the company does not need to refurnish retail outlet every year, hence no significant cost.

8. Share price trend

Looking at stock's price trend helps a little on analyzing the current market sentiment. I personally prefer to invest when the stock is at a consolidating or uptrend phase, since during downtrend there is no way one could predict when is the lowest point for entry.

Now let's look at the chart below. Padini has a steady increasing share price from 2016 to 2018. However, near to the end of 2018, the share price dropped sharply from RM5.62 to RM3.47. Why? Reason being the group posted a 42% drop in its net profit for the first financial quarter ended Sept 30, 2018 (1Q2019 - RM18 million; 1Q2018 - RM31 million), due to increase in both labour and rental costs.

The recent Covid-19 pandemic has resulted the share price to plummet again in Mar'20. However, subsequently we do notice the share price has entered a consolidating phase or in fact a gradual uptrend recovery stage. This could indicate a good opportunity to purchase a quality undervalued stock (point 9 below).

Source: Updated share price as of 10 Mar 2021

9. Strong management team

Firstly, the company is a homegrown family business, where Yong Pang Chaun (Managing Director) is the founder of the business, together with his wife, Chong Chin Lin (Executive Director) also a member of the senior management team. Average tenure period of the management team is above 6 years where the management team also comprise of a mixture of expertise, from marketing to retail sector.

Further, the management including Mr. Yong and his wife hold on to substantial amount of the Padini's shares, which denotes management strong faith in the business model.

10. Conclusion: To buy or not to buy?

With its solid balance sheet and consistent dividend payments (even during recessions in 2008 and 2009), it is no doubt a good stock to invest.

The next important question will be what is the entry price that I am willing to enter?

As a value investor, I would prefer to enter when the stock falls below its intrinsic value:

a) Fair value (include 33% margin of safety) = RM2.55

b) Discounted cash flow = RM1.63

c) Based on Earning method = RM2.12

*Intrinsic value is calculated based on my personal valuation

[Update Mar 2021]: Due to the risks and uncertainties on the business, the Group has decided to take a more conservative move by not declaring any dividend since Feb 2020 as to retain flexibility of cash flows to meet its business operation.

In my opinion, the share now is overvalued and the current share price has reflected its future earnings. Therefore, it would be a better option for investors to keep Padini in the watchlist at the moment.

Feel free to share with me your opinion below :)

Disclaimer: I am neither an expert nor certified trader, and the views contained in this post should not be taken as an indication to buy or sell. I will not be held liable for any gains or losses incurred as a result of one's individual investing decisions after reading this post.

#financial #investing #padini