Stock Pick 2014: Padini Holding Berhad kcchongnz
Author: kcchongnz | Publish date: Tue, 21 Jan 13:57
Stock Pick 2014: Padini Holding Berhad
“The Lesson is, we all need to expose ourselves to the winds of change”
― Andrew S. Grove, Only the Paranoid Survive
Padini’s net profit for the last financial year ended 30 June 2013 dropped by 10%, the first ever drop since 10 years ago. Is there a change in consumer preference in fashions which adversely impacting on the bottom line of Padini? For sure the management will not sit still but respond to it positively.
Share price performance
The share price of Padini shot up from an adjusted price of RM1.00 from two years ago to more than RM2.00 in less than a year in August 2012. Since then due to the drop in profit, the share price retreated and has been hovering around RM1.75 to RM2.00 for a long time before closing at RM1.75 on 21 January 2014 as shown in Figure 1 below.
Figure 1: 3-year price movement of Padini
The business
Padini Holdings Berhad involves in dealing of ladies' shoes and accessories, garments and ancillary products, children's garments, maternity wear and accessories. The Company principally operates in Malaysia. The Company's subsidiaries include Vincci Ladies' Specialties Centre Sdn. Bhd., Padini Corporation Sdn. Bhd., Seed Corporation Sdn. Bhd., Yee Fong Hung (Malaysia) Sendirian Berhad, Mikihouse Children's Wear Sdn. Bhd., Padini Dot Com Sdn. Bhd., Padini International Limited, Vincci Holdings Sdn. Bhd. and The New World Garment Manufacturers Sdn. Bhd.
Growth
For the past years seven years from 2006 to 2013, revenue has been increasing unabated at a CAGR of 16% from 286m to 790m as shown in Figure 2 below. Net profit on the other hand also rose in tandem at a CAGR of 23% from 27.8m to 95.3m to 2012, but tumbled by 10% a year later. That would explain the rise and fall of its share price during the same period. This decline in net profit last year was caused mainly by increase in selling and distribution costs incurred by 10 new stores, faster than the revenue growth.
So was the fall of its share price, or the stagnation of its share price while others rose sharply the past one year, justifiable?
Figure 2: Revenue and profit (000) of Padini
Quality of business
Figure 3 below shows the return of capital for the past 7 years.
The return of equity has been quite consistent at an average of 25% (>15%) which is pretty good. ROIC is even much better averaging 37% which is way above the cost of capitals, even went as high as 45% last year. These demonstrate that the quality of the business is great and we can conclude that Padini has a great business.
For the past 5 years, the quality of earnings is reasonably good with cash flows from operations averaging 113% of net income. Last year, CFFO of 162m amounts to 189% of net profit. Free cash flows is reasonably good. For last year, FCF of 145m amounts to 18% of revenue and 75% of invested capital. The balance sheet of Padini is healthy with an excess cash of 206m, or 31 sen per share.
Figure 3: Profit margin and return of capitals of Padini
Market valuation of Padini
The stock price of a great business is usually traded at high multiples of earnings. At the price of RM1.74 now, Padini is trading at a PE ratio of 13.4 based on the EPS of 13 sen for the last financial year. Market Enterprise Value is undemanding at 1.2 times revenue and 8.1 times the earnings before interest and tax. This is equivalent to an earnings yield of 12%. Price-to-book is at 3.1, a little high. I would say a great company of Padini is selling very reasonably considering its growth potential. For the first quarter 2014 ended 30 November, revenue continues to grow by 8% and profit has expanded by 10% compared to the corresponding quarter the previous year.
Intrinsic value of Padini
Financial theory postulated by John Burr Williams in his “The theory of investment value” says that the value of a stock is worth all of the future cash flows expected to be generated by the firm, discounted by an appropriate risk-adjusted rate.
Using a discount cash flow analysis with a reasonable assumption of 10% growth for the next 5 years and 5% thereafter, and a discount rate of 10% for the equity holders, the intrinsic value of Padini is RM2.30 per share. This presents a 33% upside potential from its present price or RM1.74.
Conclusion
Padini has a durable business which will last for some years to come. The quality of its business is great as evidenced from its high return of capitals, stable earnings and good cash flows. The market valuations are undemanding. The management has been proactively making necessary changes in merchandising and pricing strategies to suit the changing consumer preference. Positive results is evidenced from the latest quarterly results ended 30 September 2013 with revenue and profit growth of about 10%. A conservative estimate of its intrinsic value shows there is an adequate margin of safety investing at the present price of RM1.74 per share. Hence I have included Padini as a stock in my new portfolio in 2014.
K C Chong written in Auckland on 21 January 2014
“The Lesson is, we all need to expose ourselves to the winds of change”
― Andrew S. Grove, Only the Paranoid Survive
Padini’s net profit for the last financial year ended 30 June 2013 dropped by 10%, the first ever drop since 10 years ago. Is there a change in consumer preference in fashions which adversely impacting on the bottom line of Padini? For sure the management will not sit still but respond to it positively.
Share price performance
The share price of Padini shot up from an adjusted price of RM1.00 from two years ago to more than RM2.00 in less than a year in August 2012. Since then due to the drop in profit, the share price retreated and has been hovering around RM1.75 to RM2.00 for a long time before closing at RM1.75 on 21 January 2014 as shown in Figure 1 below.
Figure 1: 3-year price movement of Padini
The business
Padini Holdings Berhad involves in dealing of ladies' shoes and accessories, garments and ancillary products, children's garments, maternity wear and accessories. The Company principally operates in Malaysia. The Company's subsidiaries include Vincci Ladies' Specialties Centre Sdn. Bhd., Padini Corporation Sdn. Bhd., Seed Corporation Sdn. Bhd., Yee Fong Hung (Malaysia) Sendirian Berhad, Mikihouse Children's Wear Sdn. Bhd., Padini Dot Com Sdn. Bhd., Padini International Limited, Vincci Holdings Sdn. Bhd. and The New World Garment Manufacturers Sdn. Bhd.
Growth
For the past years seven years from 2006 to 2013, revenue has been increasing unabated at a CAGR of 16% from 286m to 790m as shown in Figure 2 below. Net profit on the other hand also rose in tandem at a CAGR of 23% from 27.8m to 95.3m to 2012, but tumbled by 10% a year later. That would explain the rise and fall of its share price during the same period. This decline in net profit last year was caused mainly by increase in selling and distribution costs incurred by 10 new stores, faster than the revenue growth.
So was the fall of its share price, or the stagnation of its share price while others rose sharply the past one year, justifiable?
Figure 2: Revenue and profit (000) of Padini
Quality of business
Figure 3 below shows the return of capital for the past 7 years.
The return of equity has been quite consistent at an average of 25% (>15%) which is pretty good. ROIC is even much better averaging 37% which is way above the cost of capitals, even went as high as 45% last year. These demonstrate that the quality of the business is great and we can conclude that Padini has a great business.
For the past 5 years, the quality of earnings is reasonably good with cash flows from operations averaging 113% of net income. Last year, CFFO of 162m amounts to 189% of net profit. Free cash flows is reasonably good. For last year, FCF of 145m amounts to 18% of revenue and 75% of invested capital. The balance sheet of Padini is healthy with an excess cash of 206m, or 31 sen per share.
Figure 3: Profit margin and return of capitals of Padini
Market valuation of Padini
The stock price of a great business is usually traded at high multiples of earnings. At the price of RM1.74 now, Padini is trading at a PE ratio of 13.4 based on the EPS of 13 sen for the last financial year. Market Enterprise Value is undemanding at 1.2 times revenue and 8.1 times the earnings before interest and tax. This is equivalent to an earnings yield of 12%. Price-to-book is at 3.1, a little high. I would say a great company of Padini is selling very reasonably considering its growth potential. For the first quarter 2014 ended 30 November, revenue continues to grow by 8% and profit has expanded by 10% compared to the corresponding quarter the previous year.
Intrinsic value of Padini
Financial theory postulated by John Burr Williams in his “The theory of investment value” says that the value of a stock is worth all of the future cash flows expected to be generated by the firm, discounted by an appropriate risk-adjusted rate.
Using a discount cash flow analysis with a reasonable assumption of 10% growth for the next 5 years and 5% thereafter, and a discount rate of 10% for the equity holders, the intrinsic value of Padini is RM2.30 per share. This presents a 33% upside potential from its present price or RM1.74.
Conclusion
Padini has a durable business which will last for some years to come. The quality of its business is great as evidenced from its high return of capitals, stable earnings and good cash flows. The market valuations are undemanding. The management has been proactively making necessary changes in merchandising and pricing strategies to suit the changing consumer preference. Positive results is evidenced from the latest quarterly results ended 30 September 2013 with revenue and profit growth of about 10%. A conservative estimate of its intrinsic value shows there is an adequate margin of safety investing at the present price of RM1.74 per share. Hence I have included Padini as a stock in my new portfolio in 2014.
K C Chong written in Auckland on 21 January 2014
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| Chart | Stock Name | Last | Change | Volume |
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