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5 Things to Know About Padini Before Investing



Introduction


Recently our team met up with Ms Sharon Sung – Chief Financial Officer (CFO) of Padini at their HQ located in Shah Alam. Before jumping into the key facts, here is an introduction to Padini Holdings Berhad. Padini started from humble beginnings in the apparel industry; Padini’s roots are in the manufacturing, trading and supplying of garments to retailers and distributors. However, driven by its founder/ current Managing Director (Mr Yong Pang Chaun) vision, Padini ventured into distribution and retail by creating its own brands catering to specific consumer niches.


Value Investing College (VIC) site visit to Padini: Discussion Session with Ms Sharon Sung, CFO of Padini

Value Investing College (VIC) site visit to Padini: Ms Sharon Sung, CFO of Padini (12th from left)

Today, Padini Group is a leader in the multibillion textile and garment industry in Malaysia. Its has nine labels in the portfolio of brands and retail in 330 freestanding stores, franchised outlets and consignment counters in Malaysia and around the world. Padini’s labels proudly carry the Made in Malaysia stamp abroad in Bahrain, Brunei, Cambodia, Egypt, Indonesia, Kuwait, Morocco, Myanmar, Oman, Pakistan, Philippines, Qatar, Saudi Arabia, Syria, Thailand and United Arab Emirates.


Padini addresses fashion conscious consumers of both genders and all ages through 10 distinct brands: Padini, Seed, Padini Authentics, PDI, P&Co, Vincci, Vincci Accessories, Tizio, Miki Kids and Brands Outlet. Each of these labels represents a particular fashion philosophy and encompasses a comprehensive range of products that fit into its targeted consumer’s universe.


1. Successful Shift in business model


Over the past few years, Padini has closed down loss- making stores and consolidated them into concept stores. Closing a store usually gives a negative signal that the presence of the brand has declined. However, for Padini, even though the numbers of stores have been reduced, the gross floor area to showcase its brands has increased through the opening of more concept stores.

Figure 1: Padini's local distribution network breakdown by brand

Housing all the brands under a concept store has significantly reduced group’s rental per square foot (sqft). Single brand stores with smaller gross floor area have to be positioned in high traffic areas to attract customers, which normally comes with higher rental rates. Furthermore, the management of the shopping malls may reserve these areas for international brands. Concept stores solve these problems according to Ms Sharon Sung, as a 20,000 sqft selling floor area could be located at a less strategic place, with lower rental rate, and it also helps the shopping malls attract customers to remote areas. The switch over to the concept store strategy also reduces operating expenses, especially staff costs.

Figure 2: Padini Concept Store with multiple brands

2. Growth Driver & Expansion Plans


During the meeting, Padini’s Chief Financial Officer, Ms Sharon shared about Padini’s growth plans for local, overseas and e-commerce aspects. In the local Malaysian market, undaunted by the intense retail competition with the recent entrance of foreign brands such as Uniqlo, H&M and Zara, Padini has launched 10 of 12 new stores (6 Padini Concept Stores and 6 Brands Outlet stores) planned for FY2018. Ms Sharon stated while being aware of the strong competition, Padini will continue to open new stores in some key area as well as in bigger upcoming malls. The management also intends to carry out refurbishments for at least one Padini Concept store and 3 Brands Outlet stores.


Ms Sharon also shared Padini’s overseas expansion plan is to tap into ASEAN country like Cambodia then Thailand because these regions have the most potential emerging market on top of being our neighbouring country. Since the incorporation of Padini (Cambodia) Co. Ltd on 2 August 2017, Padini has penetrated the Cambodian retail market with its first overseas Vincci store is in Cambodia which has been operating for 6 months. Recently, Padini have added two more new stores in Cambodia. In terms business performance in Cambodia, Ms Sharon stated that Cambodians has accepted Padini well so far, the business in the country has been good. She opined that it is well within Padini’s capability to adapt to Cambodia’s demand preferences and its targeted segments to find some success abroad. Cambodian market has huge potential because of the rising affluence of its young middle class.


Figure 3: Padini's Expansion Overseas

In order to grow its earnings, Padini set up Padini Dot Com Sdn Bhd to tap into the rise to e-commerce and cater to customers who prefer to shop online. Padini has started selling its products online via its own platforms. The online e-commerce business currently contributes less than 1% of total group revenue but Sharon believes the segment holds promise, expanding more than 50% over a one-year period. Padini’s e-commerce business currently has penetrated into Singapore and further plans to tap into neighbouring countries rather than just confining themselves to local market and physical stores.

Figure 4: Padini.Com Main Webpage

Figure5: Padini.Com Hot Deal Webpage

3. Consistent Profit Generation


Padini’s Revenue and Net Profit After Tax (NPAT) have been growing steadily from the since year 2013 with Compounded Annual Growth Rate (CAGR) of 18.75% and 16.58% respectively. Padini’s financial year end is at the end of June, hence its latest quarterly report will be the third quarter of financial year 2018. As compared to the second quarter, Padini’s both Revenue and NPAT grew 14% from RM373.7mil to RM425.3mil and from RM34.8mil to RM39.8mil respectively.

Figure 6: Padini's Revenue and Net Profit after Tax (2013 – 2018 Q3)

The breakdown of Padini Holdings Berhad revenue show Brands Outlet and P&Co have the highest segmental revenue contribution to the overall Revenue which is 32% followed by Padini, Padini Authentics and PDI which is 29%. However, in terms of its Profit Before Tax, Management Services & Investment Holdings have the highest contribution which is 29% then followed by Padini, Padini Authentics, PDI, Brands Outlet and P&Co which are 21%.

From the pie chart, Miki Kids and Seed contribute the least to the group’s Revenue and Profit. Which means, Padini does not really depend on these 2 brands as it is more focused on its Padini, Brands Outlet and Vincci brands.


The breakdown of Padini Holdings Berhad revenue show Brands Outlet and P&Co have the highest segmental revenue contribution to the overall Revenue which is 32% followed by Padini, Padini Authentics and PDI which is 29%. However, in terms of its Profit Before Tax, Management Services & Investment Holdings have the highest contribution which is 29% then followed by Padini, Padini Authentics, PDI, Brands Outlet and P&Co which are 21%.

From the pie chart, Miki Kids and Seed contribute the least to the group’s Revenue and Profit. Which means, Padini does not really depend on these 2 brands as it is more focused on its Padini, Brands Outlet and Vincci brands.

Figure 7: Padini Holdings Berhad Profitability Analysis

Padini’s Gross Profit Margin (GPM) has been maintaining around 40% to 50%, which means on the average, every pair of clothes that is priced at RM50, they will have a profit of RM20 at the gross level. As a rule of thumb, if the company is able to maintain their GPM over 40% over the years, it can be an indicator that the company has a certain moat, competitive advantage. Since Padini does not price their goods expensively, this level of GPM may be a strong indicator that is has the ability to drive the cost down.

Figure 8: Vincci Ladies Specialties is the 3rd largest revenue contributor of Padini Holdings Berhad

The consistent net profit of Padini is a result of good cost management. Rental cost is Padini’s major operating costs which contributes 1/3 of the operating expenditure. Well known shopping malls charges premium rental rates especially strategically located store outlet. However, Ms Sharon mentioned that Padini has bargaining power when it comes to negotiation of rental rates as Padini stores occupies large spaces and acts as the malls anchor tenants. Padini adopts the rent instead of owning the stores strategy as it allows them to exit easily if needed. The company does not mind paying slightly high rental if its profit generating.

Figure 9: Brands Outlet the highest and fastest growing subsidiary of Padini Group

4. Strong Financial Position


The financial position of Padini Holdings Berhad is at a very strong net cash position. Ms Sharon stated that they will be using this pile of cash to work on regional expansion. Regional expansions required new stores and renovation of stores. Hence, it is very crucial for Padini to have cash for this cycle. Padini managed to increase its cash & cash equivalent nearly 5 folds in the last 5 years while keeping its borrowings at conservative level. Padini’s management has consistently increased its shareholders’ value to nearly double in just the last 5 years.

Padini is a cash- producing business and does not need to frequently raise equity or debt to expand its business and reward its shareholders with dividends. As at 31 March 2018, Padini has RM405.7 million in cash reserves and very low debt-to-equity ratio of 0.03. Padini has grown its dividend per share from 3.0 cents in 2008 to 11.5 cents in 2017. As at 10th August 2018, Padini’s share price is trading at RM 5.99. If Padini is able to maintain its dividend per share at 11.5 cents, its expected dividend yield is 2%.

Figure 10: Padini Holdings Berhad healthy financial position

5. Succession plan in place


Padini is a family-owned business, founded by Mr Yong Pang Chaun, the current Managing Director. The family has a total shareholding of about 47%. The company’s succession plan involves the 2nd generation of the Yong family as 3 sons of Mr Yong Pang Chaun has taken up important roles in the company. The eldest son, Mr Andrew Yong is a computer science graduate who joined Padini in 2008 as its IT manager. Presently, Andrew is an executive director of Padini Holdings Berhad and is in charge of managing all IT assets owned by the company. The second son, Benjamin Yong is responsible of merchandising and marketing department. His educational background is in Mass Communications and he has been with the company for more than 10 years. He has become one of the Executive Directors after working more than 10 years with the company. The third son, Chris Yong is responsible for the brand Brands Outlet. His educational background is in finance.

Figure 12: Mr Yong Pang Chaun, Andrew Yong, Benjamin Yong as Directors of Padini Holdings Berhad (Source: Annual Report 2017)

Mr Yong Pang Chaun without doubt has successfully able to transition its Padini’s business model from consignment counters to anchor tenant concept stores and steering the business through economic slowdowns does indicates a certain degree of key person risk of the business. However, we opined that this risk has been mitigated with the positive outcome of Mr Yong Pang Chaun 3 sons able to be held responsible and hold key positions in the company.


Despite facing a competitive market, we opined that Padini Holdings Berhad is able to differentiate itself from its competitors and build brand awareness and identity allows the group to thrive in the industry, even during economic slowdown. However, we must be watchful for any rise of minimum wage, new competition and execution of its growth plans.


Disclaimer: All facts and opinions presented are for educational purposes only. This is not a recommendation to buy or to sell. The author involved in the writing of this message has no vested interest in the companies. Please consult a professional for expert financial or other assistance or legal advice.

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